CWB reports exceptional first quarter financial performance
Record earnings and total revenues
Dividends declared on both common and preferred shares
EDMONTON, March 4 /CNW/ - Canadian Western Bank (CWB on TSX) today announced an exceptional first quarter financial performance highlighted by record earnings and total revenues and the Bank's 87th consecutive profitable quarter. First quarter net income of $40.0 million increased 56% compared to the same quarter last year. The increase reflects a 57 basis point recovery in net interest margin, on a taxable equivalent basis (teb - see definition following Financial Highlights table), to more normal historical levels and very strong other income. Diluted earnings per common share increased 30% to a record $0.52 and include the net impact of the preferred units issued in March 2009. Compared to the prior quarter, the combined positive impact of a 22 basis point recovery in net interest margin (teb), a 19% increase in other income and lower non-interest expenses led to growth in net income and diluted earnings per common share of 32% and 33%, respectively.
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First Quarter Highlights:
(three months ended January 31, 2010 compared with three months ended
January 31, 2009 unless otherwise noted)
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- Record net income of $40.0 million, up 56%.
- Record diluted earnings per common share of $0.52, up 30%, which
includes the net impact of the preferred units issued in March 2009.
- Record return on common shareholders' equity of 18.0%, up 330 basis
points. Total shareholders' equity surpassed the $1 billion
milestone.
- Record quarterly total revenues (teb) surpassed the $100 million
milestone to reach $100.7 million, up 31%.
- Net interest margin (teb) of 2.56%, up 57 basis points compared to
last year and up 22 basis points from the prior quarter.
- Tier 1 capital ratio of 11.6% and total capital ratio of 15.1%, up
from 8.7% and 13.0% respectively.
- Record quarterly earnings contribution from Canadian Direct
Insurance.
- Announced the acquisition of National Leasing Group Inc. (National
Leasing), completed February 1, 2010.
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On March 3, 2010, CWB's Board of Directors declared a cash dividend of $0.11 per common share, payable on April 1, 2010 to shareholders of record on March 18, 2010. This quarterly dividend is unchanged from both the previous quarter and one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on April 30, 2010 to shareholders of record on April 21, 2010.
Record banking and trust earnings of $36.7 million were up 48% compared to the same quarter last year as the positive earnings impact from the strong recovery in net interest margin and 3% loan growth helped push this segment's total revenues (teb) up 27% to reach $93.2 million. Quarterly net income from insurance operations was a record $3.3 million, up $2.5 million compared to a year earlier reflecting a positive $1.9 million before tax contribution from the Alberta risk sharing pools and solid results in the core underwriting business.
"The first quarter included record performance from both business segments that resulted from a combination of positive circumstances," said Larry Pollock, President and CEO of CWB. "Margins recovered more quickly than we expected and Canadian Direct posted a very strong contribution. High gains on securities sales further increased earnings reflecting both our investment strategies and favourable capital market conditions. While it will be very difficult to duplicate these exceptional results through the remaining three quarters, fiscal 2010 is so far shaping up to be a great year for CWB."
"The real benefit of strategies implemented in fiscal 2009 to help mitigate margin compression, together with lower deposit costs, is now clearly evident. Although we expect net interest margin will be stable from here on, absent meaningful increases in the prime rate, this recovery will positively impact our results for the rest of the year."
"Overall loan growth continues to be impacted by the recessionary slowdown and an atmosphere of uncertainty, particularly in the equipment financing and real estate construction portfolios," continued Pollock. "While there are many positive indicators, we expect ongoing challenges until there is a sustained and clear recovery in global economies. We have exceptional growth potential, but our near-term focus will remain concentrated on maintaining our sound credit quality as we progress through the bottom of the current credit cycle."
"Perhaps the most significant highlight this quarter was our announced acquisition of National Leasing, which we completed on February 1st. This company, with its seasoned management and dedicated employees, is an excellent fit with the CWB Group. National Leasing immediately adds about $390 million of balance sheet assets and should be accretive right out of the gate. But that's just the beginning; we believe this acquisition represents a meaningful step in taking CWB to another level of profitability and growth," Pollock added.
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Financial Highlights
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For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except January 31 October 31 January 31 January 31
per share amounts) 2010 2009 2009 2009
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Results of Operations
Net interest income
(teb - see below) $ 74,306 $ 68,012 $ 54,596 36%
Less teb adjustment 2,563 2,397 1,586 62
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Net interest income
per financial
statements 71,743 65,615 53,010 35
Other income 26,366 22,087 22,351 18
Total revenues (teb) 100,672 90,099 76,947 31
Total revenues 98,109 87,702 75,361 30
Net income 40,035 30,357 25,619 56
Earnings per
common share
Basic(1) 0.57 0.42 0.40 43
Diluted(2) 0.52 0.39 0.40 30
Return on common
shareholders'
equity(3) 18.0% 13.7% 14.7% 330 bp(4)
Return on assets(5) 1.25 0.91 0.93 32
Efficiency
ratio(6) (teb) 40.0 46.1 47.3 (730)
Efficiency ratio 41.0 47.4 48.3 (730)
Net interest
margin (teb)(7) 2.56 2.34 1.99 57
Net interest margin 2.47 2.25 1.93 54
Provision for credit
losses as a
percentage of
average loans 0.16 0.15 0.15 1
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Per Common Share
Cash dividends $ 0.11 $ 0.11 $ 0.11 -%
Book value 12.67 12.16 11.10 14
Closing market value 20.56 21.38 11.93 72
Common shares
outstanding
(thousands) 63,977 63,903 63,468 1
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Balance Sheet and
Off-Balance Sheet
Summary
Assets $11,641,634 $11,635,872 $10,907,072 7
Loans 9,282,180 9,236,193 8,993,453 3
Deposits 10,003,921 9,617,238 9,523,097 5
Subordinated
debentures 315,000 375,000 375,000 (16)
Shareholders'
equity 1,020,642 986,499 704,603 45
Assets under
administration 5,461,921 5,467,447 4,141,064 32
Assets under
management 880,786 878,095 809,500 9
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Capital Adequacy(8)
Tangible common
equity to risk-
weighted assets(9) 8.4% 8.0% 7.5% 90
Tier 1 ratio 11.6 11.3 8.7 290
Total ratio 15.1 15.4 13.0 210
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(1) Basic earnings per share is calculated as net income less preferred
share dividends divided by the average number of common shares
outstanding.
(2) Diluted earnings per share is calculated as net income less preferred
share dividends divided by the average number of common shares
outstanding adjusted for the dilutive effects of stock options and
warrants.
(3) Return on common shareholders' equity is calculated as annualized net
income after preferred share dividends divided by average common
shareholders' equity.
(4) bp - basis point change.
(5) Return on assets is calculated as annualized net income after
preferred share dividends divided by average total assets.
(6) Efficiency ratio is calculated as non-interest expenses divided by
total revenues.
(7) Net interest margin is calculated as annualized net interest income
divided by average total assets.
(8) Capital adequacy is calculated in accordance with guidelines issued
by the Office of the Superintendent of Financial Institutions Canada
(OSFI).
(9) Tangible common equity to risk-weighted assets is calculated as
shareholders' equity less subsidiary goodwill divided by risk-
weighted assets, calculated in accordance with guidelines issued by
OSFI.
Taxable Equivalent Basis (teb)
Most banks analyze revenues 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 GAAP and, therefore, may not be comparable to similar measures presented by other banks. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.
Non-GAAP Measures
Taxable equivalent basis, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, provisions for credit losses as a percentage of average loans and tangible common equity to risk-weighted assets do not have standardized meanings prescribed by generally accepted accounting principles (GAAP) and therefore may not be comparable to similar measures presented by other financial institutions.
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Message to Shareholders
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Canadian Western Bank (CWB or the Bank) is pleased to report exceptional financial performance for its 87th consecutive profitable quarter, a period spanning nearly 22 years. Highlights for the first quarter included the achievement of record earnings and total revenues and the announcement of CWB's acquisition of National Leasing Group Inc. (National Leasing), completed on February 1, 2010.
First quarter net income of $40.0 million was up 56% ($14.4 million) compared to the prior year, while diluted earnings per common share increased 30% ($0.12) to a record $0.52. Lower percentage growth for diluted earnings per common share compared to net income reflects the net impact of the preferred units issued in March 2009. The quarterly net interest margin (teb) of 2.56% represented a return to more normal historical levels and led to record total revenues, on a taxable equivalent basis (teb - see definition following Financial Highlights table), of $100.7 million, a 31% ($23.7 million) increase. Other income was up 18% ($4.0 million) and included a record $3.3 million quarterly earnings contribution from Canadian Direct Insurance. Compared to the previous quarter, net income and diluted earnings per common share increased 32% and 33% respectively and include the combined positive impact of an improved net interest margin, higher other income and slightly lower non-interest expenses.
The Bank's very strong Tier 1 and total capital ratios at January 31, 2010 of 11.6% and 15.1%, respectively, remained well above our internal target thresholds and continued to build from prior quarters with the ongoing retention of earnings. The combination of CWB's very strong balance sheet and capital position continue to provide us with flexibility to deploy capital and pursue strategic growth opportunities for the long-term benefit of CWB shareholders. The completed acquisition of National Leasing is expected to have a modest negative impact on capital adequacy ratios. We will report National Leasing's financial performance as a component of the banking and trust segment beginning with our second quarter results.
Return on equity of 18.0% was up 330 basis points compared to the same quarter last year and 430 basis points from the prior quarter. Quarterly return on assets of 1.25% represented a 32 basis point improvement from a year earlier and was up 34 basis points compared to last quarter. Compared to the first quarter last year, profitability ratios benefited from the strong recovery in net interest margin and higher other income, partially offset by the net impact from the preferred units issued in March 2009. The higher profitability ratios compared to the previous quarter reflect the factors already noted excluding the impact of preferred share dividends.
Dividends
On March 3, 2010, CWB's Board of Directors declared a cash dividend of $0.11 per common share, payable on April 1, 2010 to shareholders of record on March 18, 2010. This quarterly dividend is unchanged from both the previous quarter and one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on April 30, 2010 to shareholders of record on April 21, 2010.
Loan Growth
Total loans grew $46 million in the quarter and $289 million (3%) over the past year reflecting the realities of significantly moderated economic activity and a cautious outlook regarding the timing and strength of the economic recovery. Lingering recessionary effects continue to impact new deal flow, particularly in the equipment financing and real estate construction portfolios. Slow loan growth also reflects both expected and unexpected repayments on existing loans. Consistent with fiscal 2009, some customers across each lending sector have prudently scaled back their operations and directed cash flows towards the repayment of debt. That being said, our acquisition of National Leasing will increase loans and the existing pipeline for new lending opportunities is encouraging. While our 2010 target for double-digit loan growth is aggressive in the current environment, our past results demonstrate that it is still an achievable objective.
Credit Quality
Overall credit quality continues to remain satisfactory and within expectations considering ongoing economic challenges. The dollar level of gross impaired loans was $146.4 million compared to $137.9 million last quarter. The dollar level of loans classified as impaired during the quarter of $45.7 million was largely offset by $30.7 million of impaired accounts that were paid down or resolved. Our proactive management and secured lending practices have assisted in the early identification and resolution of problem loans and we will remain diligent in this regard. The quarterly provision for credit losses of $3.7 million represented 16 basis points of average loans and was within our targeted range for the year of 15 to 20 basis points. While the level of gross impaired loans will continue to fluctuate as we progress through the bottom of the credit cycle, based on our present view of credit quality, actual losses are expected to remain within the Bank's range of acceptable levels.
Branch Deposit Growth
Deposits raised through our branch network and Canadian Western Trust Company were up 10% compared to a year earlier, but down 1% from last quarter. The demand and notice component within branch-raised deposits, which are typically lower cost, grew 37% in the last twelve months and were up 3% in the quarter. The significant growth in demand and notice deposits supports our strategies to further enhance and diversify the Bank's core funding sources and largely reflects CWT's appointment last year as trustee for a major Canadian investment dealer. In addition to the benefits of diversification, our success in shifting the deposit mix toward lower cost demand and notice deposits will provide an improved funding base and continue to support net interest margin.
Net Interest Margin
Compared to a year earlier, lower deposit costs, an improved deposit and securities mix, higher loan prepayment fees and more favourable spreads on both new and renewed loans all contributed toward a 57 basis point recovery in net interest margin (teb) to 2.56%. Net interest margin (teb) was up 22 basis points over the prior quarter mainly reflecting the maturities of higher cost one-year term deposits that were raised through the broker deposit network in the first quarter last year to increase liquidity during the peak of the global financial crisis. The current quarter net interest margin was more typical of spreads achieved prior to the crisis and edged closer to CWB's historical average much sooner in 2010 than initially anticipated. Further material improvements in margins for fiscal 2010 are unlikely without meaningful increases in the prime rate. Our acquisition of National Leasing is expected to have a positive impact on net interest margin, but we are also mindful of competitive influences in all of our markets that may work against further significant expansion.
Trust and Wealth Management Services
Our trust and wealth management businesses represent an important part of our overall strategy and continue to provide opportunities for earnings growth, geographic expansion, income diversification and brand awareness. Canadian Western Trust Company, which includes our Optimum Mortgage business, continued to post very strong financial performance and we are optimistic about opportunities to grow the contributions from these sources. We are also very positive about the future earnings potential of Valiant Trust Company, which is actively adding new client relationships through its strong marketing efforts and was recently approved as a federal deposit-taking institution. Adroit Investment Management Ltd. continued to grow its assets under management and we will look to further expand our presence in wealth management through both organic growth and acquisitions.
Insurance
Canadian Direct Insurance Incorporated (Canadian Direct) started the year with record net income of $3.3 million. Strong results included a $1.9 million before tax contribution from Canadian Direct's share of the Alberta risk sharing pools (the Pools) and solid performance in the home lines of business that reflect improved pricing and favourable weather conditions. The Pools' results included a $1.5 million before tax decrease in unpaid claims reserves as a result of a December 2009 decision by the Supreme Court of Canada that denied leave to appeal the cap on minor injuries suffered in an automobile accident.
Outlook
CWB's first quarter results represent an exceptional start for fiscal 2010. Net interest margin recovered significantly from the trough level experienced in the second quarter of 2009 and, given a normal operating environment, we expect margin will remain relatively stable for the remainder of the year. First quarter other income included a very strong contribution from the insurance segment and was further augmented by a high level of securities gains that is unlikely to be sustained going forward. Meeting our target for double-digit loan growth will be challenging until we enter a period of sustained economic growth, but we are very positive about our position to capitalize on growth opportunities once the economic recovery takes hold. We are also very confident about the benefits of our proven business plan and core geographic position in Western Canada. All of our subsidiaries have excellent growth prospects and the acquisition of National Leasing represents an important step in further broadening our product lines and enhancing geographic diversification. We expect economic challenges in our markets to persist, particularly in areas related to natural gas exploration in Alberta, but our solid balance sheet and strong capital base ensure that we are very well positioned to manage through any ongoing challenges. We are also ready to capitalize on other strategic opportunities, including further acquisitions, that support our commitment to create value and growth for shareholders over the long-term.
We look forward to reporting our fiscal 2010 second quarter results on June 3, 2010.
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Q1 Results Conference Call
CWB's first quarter results conference call is scheduled for Thursday,
March 4, 2010 at 2:00 p.m. ET (12:00 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
647-427-7450 or toll-free 1-888-231-8191. 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 18, 2010 by
dialing 416-849-0833 (Toronto) or 1-800-642-1687 (toll-free) and entering
passcode 56178290.
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About Canadian Western Bank Group
Canadian Western Bank offers a full range of business and personal banking services across the four western provinces and is the largest Canadian bank headquartered in Western Canada. The Bank, along with its operating subsidiaries, Canadian Western Trust Company, Valiant Trust Company, Canadian Direct Insurance Incorporated, National Leasing Group Inc., Adroit Investment Management Ltd. and Canadian Western Financial Ltd., collectively offer a diversified range of financial services across Canada and are together known as Canadian Western Bank Group. The common shares of Canadian Western Bank are listed on the Toronto Stock Exchange under the trading symbol 'CWB'. Refer to www.cwbankgroup.com for additional information.
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Management's Discussion and Analysis
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This management's discussion and analysis (MD&A) should be read in conjunction with Canadian Western Bank's (CWB or the Bank) unaudited interim consolidated financial statements for the period ended January 31, 2010, as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2009, 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 2009 remain substantially unchanged.
Overview
CWB recorded exceptional first quarter results reflecting record financial performance from both business segments. First quarter net income from banking and trust operations of $36.7 million was up 48% ($11.9 million) compared to one year ago despite ongoing economic challenges and uncertainty regarding both the timing and strength of the recovery. The positive revenue contributions from a strong recovery in net interest margin, 3% loan growth and slightly higher other income offset the impact of 11% ($3.7 million) higher non-interest expenses and a $0.3 million increase in the quarterly provision for credit losses. Canadian Direct Insurance Incorporated (Canadian Direct) posted record quarterly net income of $3.3 million, up $2.5 million from a year earlier. Insurance segment results included a $1.9 million before tax ($1.3 million after tax) earnings contribution from Canadian Direct's share of the Alberta risk sharing pools and solid results in the core underwriting business. Consolidated net income increased 56% ($14.4 million) from a year earlier to $40.0 million. First quarter earnings per diluted common share of $0.52 ($0.57 basic) grew 30% over the prior year and includes the net impact from the preferred units issued in March 2009.
Compared to the previous quarter, consolidated net income was up 32% ($9.7 million) reflecting the combined impact of the recovery in net interest margin, a $4.3 million increase in other income - including $2.4 million higher gains on sale of securities - $1.3 million lower non-interest expenses and modest loan growth. Diluted earnings per common share increased 33% ($0.13) over the prior quarter.
First quarter return on equity was a record 18.0%, a significant increase from 14.7% a year earlier. Return on assets was 1.25%, up from 0.93% last year. Compared to the same quarter in 2009, improved profitability ratios were positively impacted by very strong growth in net interest income due to the recovery in net interest margin and strong other income. These factors were partially offset by the net impact from CWB's preferred unit offerings completed in March 2009 and increased non-interest expenses. Compared to the prior quarter, return on equity was up 430 basis points, while return on assets increased 34 basis points.
Total Revenues (teb)
Total revenues, on a taxable equivalent basis (teb - see definition following Financial Highlights table), comprising both net interest income and other income, reached $100.7 million for the quarter, up 31% ($23.7 million) compared to a year earlier. Record quarterly total revenues reflect the positive impact of a strong recovery in net interest margin and an 18% ($4.3 million) increase in other income. Compared to last quarter, total revenues were up 12% ($10.6 million) including a $6.3 million increase in net interest income and $4.0 million higher other income.
Net Interest Income (teb)
Quarterly net interest income of $74.3 million was up 36% ($19.7 million) compared to the same period last year driven by a 57 basis point recovery in net interest margin to 2.56% and 3% loan growth. The recovery in net interest margin compared to the same quarter in 2009 reflects lower deposit costs, an improved deposit and securities mix, higher loan prepayment fees and more favourable spreads on both new and renewed loans. Given the Bank's current position and anticipated competitive influences going forward, management expects that a further material increase in margin from current levels is unlikely without meaningful increases to the prime lending interest rate.
Net interest income was up 9% ($6.3 million) compared to the previous quarter reflecting a 22 basis point increase in net interest margin and modest loan growth. The improved net interest margin compared to the prior quarter mainly reflects the maturity of high cost one-year term deposits raised through the broker deposit network during the peak of the global financial crisis.
Note 13 to the unaudited interim consolidated financial statements summarizes the Bank's exposure to interest rate risk as at January 31, 2010. The estimated sensitivity of net interest income to a change in interest rates is presented in the table below. The amounts represent the estimated change in net interest income over the time periods shown resulting from a one-percentage point change in interest rates. The estimates are based on a number of assumptions and factors, which include:
- a constant structure in the interest sensitive asset liability
portfolio;
- floor levels for various deposit liabilities;
- prime rate decreases limited to 0.25% due to the historical low
levels of interest rates;
- interest rate changes affecting interest sensitive assets and
liabilities by proportionally the same amount and applied at the
appropriate re-pricing dates; and
- no early redemptions.
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January 31 October 31 January 31
($ thousands) 2010 2009 2009(1)
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Impact of 1% increase in
interest rates
1 year $ (2,066) $ (6,574) $ 12,394
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1 year percentage change (0.8)% (2.5)% 5.8%
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Impact of 1% decrease in
interest rates
1 year $ 8,532 $ 10,241 $ (18,144)
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1 year percentage change 3.2% 3.8% (8.5)%
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1) Methodology for the calculation of interest sensitivity at
January 31, 2009 does not include a minimum interest rate level for
certain deposit accounts that were included in the calculation for
the subsequent periods shown.
As at January 31, 2010, a one-percentage point increase in interest rates would decrease net interest income by 0.8% over the following twelve months; this compares to January 31, 2009 when a one-percentage point increase in interest rates would have increased net interest income by 5.8% over the following twelve months. During 2009, to better manage interest rate sensitivity against falling interest rates, many prime-based loans were negotiated with a floor rate and a corresponding minimum interest rate level. Should the prime rate decrease further, the rate on these loans would remain fixed. However, when the prime rate increases, the rate on these loans only begins to go up once the floor rate is passed. In modeling the effects of a one-percentage point increase in interest rates, not all loans would increase by the full 1%, whereas, it is assumed that all liabilities increase by the full amount. The result is a decrease in net income when interest rates rise by one-percentage point, however, this effect is diminished on further increases in interest rates beyond the floor level.
As at January 31, 2010, a one-percentage point decrease in interest rates would increase net interest income by 3.2% over the following twelve months; this compares to January 31, 2009 when a one-percentage point decrease in interest rates would have decreased net interest income by 8.5% over the following twelve months. When modeling a one-percentage point decrease, the rates on prime-based loans with a negotiated floor rate do not decrease, whereas, the remainder of prime-based loans decrease by only 0.25%. Many liabilities are subject to the full one-percentage point decrease and thereby cause net interest income to rise on a decrease in rates.
Based on the interest rate gap position at January 31, 2010, it is estimated that a one-percentage point increase in all interest rates would decrease other comprehensive income by $16.1 million, net of tax (October 31, 2009 - $21.4 million); it is estimated that a one-percentage point decrease in all interest rates at January 31, 2010 would increase other comprehensive income by a similar amount.
It is management's intention to continue to manage the asset liability structure and interest rate sensitivity through pricing and product policies, as well as through the use of interest rate swaps or other appropriate hedging techniques.
Other Income
First quarter other income of $26.4 million was up 18% ($4.0 million) from a year earlier reflecting growth across almost all areas. Quarterly net insurance revenues increased 168% ($3.6 million) over the same period last year reflecting a positive $1.9 million before tax contribution from Canadian Direct's share of the Alberta risk sharing pools (the Pools) and favourable claims experience in the core product lines. The Pools' results in the quarter included a $1.5 million before tax decrease in unpaid claims reserves specifically related to a December 2009 decision by the Supreme Court of Canada that denied leave to appeal the earlier ruling regarding the cap on minor injuries suffered in an automobile accident. Credit related fee income was up 27% ($1.5 million) while trust and wealth management services revenues and retail services fee income increased 14% ($0.6 million) and 9% ($0.2 million) respectively. Gains on sale of securities of $6.5 million continued to provide a significant source of other income, but were down from $8.1 million realized in the same quarter last year. Compared to the previous quarter, other income was up 19% ($4.3 million) reflecting a $2.4 million increase in gains on sale of securities, an 18% ($1.1 million) increase in credit related fee income and 13% ($0.7 million) higher net insurance revenues.
Credit Quality
Overall credit quality remained satisfactory and within current expectations. The Bank's primary markets continue to be materially impacted by global economic factors, particularly as they relate to demand for commodities. Despite these challenges, management believes that Western Canada is positioned to benefit significantly once major global economies commence a sustained period of economic growth.
For the three months ended
-------------------------------------- Change from
(unaudited) January 31 October 31 January 31 January 31
($ thousands) 2010 2009 2009 2009
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Gross impaired loans,
beginning of period $ 137,944 $ 105,229 $ 91,635 51%
New formations 45,745 70,612 33,028 39
Reductions, impaired
accounts paid down
or returned to
performing status (30,682) (35,733) (12,414) 147
Write-offs (6,605) (2,164) (4,464) 48
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Total(3) $ 146,402 $ 137,944 $ 107,785 36%
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Balance of the ten
largest impaired
accounts $ 79,513 $ 76,101 $ 70,485 13%
Total number of
accounts classified
as impaired 234 224 176 33
Total number of
accounts classified
as impaired under
$1 million 209 199 158 32
Gross impaired loans
as a percentage of
total loans(1) 1.57% 1.49% 1.19% 38 bp(2)
(1) Total loans do not include an allocation for credit losses or
deferred revenue and premiums.
(2) bp - basis point change.
(3) Gross impaired loans includes foreclosed assets held for sale with a
carrying value of $nil (October 31, 2009 - $nil and January 31, 2009
- $901).
Gross impaired loans at January 31, 2010 were $146.4 million, compared to $137.9 million last quarter and $107.8 million a year earlier. Two large accounts with a combined balance of $32.4 million became impaired in the fourth quarter of fiscal 2009 and represent the majority of the net increase in gross impaired loans compared to a year earlier. The ten largest accounts classified as impaired measured by dollars outstanding represented approximately 54% of the total gross impaired loans at quarter end, compared to 55% in the prior quarter and 65% a year earlier. As in prior quarters, slow foreclosure processes on residential real estate in the western provinces lengthens the timeframe required to resolve certain impaired accounts.
Gross impaired loans represented 1.57% of total loans at quarter end, compared to 1.49% last quarter and 1.19% one year ago. The first quarter net new specific allowance for credit losses as a percentage of average loans was 25 basis points; this compares to the Bank's average over the past ten fiscal years of 13 basis points (including fiscal 2006 when recoveries exceeded losses). It is expected that the level of impaired loans will continue to experience considerable fluctuations as progress through the bottom of the current cycle continues. However, actual losses are expected to remain within acceptable levels. The dollar level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved and does not directly reflect the dollar value of expected write-offs given the tangible security held against the Bank's lending positions. The Bank establishes its current estimates of expected write-offs through detailed analyses of both the overall quality and ultimate marketability of the security held against impaired accounts. In consideration of current credit quality and the loan portfolio as at January 31, 2010, management expects the fiscal 2010 provisions for credit losses will remain in a range of 15 to 20 basis points of average loans, consistent with the target range established for fiscal 2010. The addition of National Leasing Group Inc (National Leasing) in the second quarter 2010 will affect the provisions for credit losses and will increase the actual range going forward given the nature of its loan portfolio. Note 16 to the unaudited interim consolidated financial statements summarizes the Bank's acquisition of National Leasing, completed February 1, 2010.
The Bank's long-standing strategy with respect to managing the allowance for credit losses has been to maintain consistent provisions to cover both identified and unidentified losses. The purpose of the general allowance for credit losses is to mitigate the timing impact of unidentified losses in the portfolio. Results in the first quarter are consistent with management's expectations that the level of the general allowance will fluctuate as specific losses are recognized and subsequently written-off. Based on results from ongoing stress-testing of the portfolio under various credit scenarios, the adequacy of the general allowance for credit losses is deemed sufficient in consideration of management's current expectations for credit quality and the secured nature of the existing loan portfolio.
The total allowance for credit losses (general and specific) represented 50% of gross impaired loans at quarter end, compared to 55% last quarter and 69% one year ago. The total allowance for credit losses (general and specific) was $72.6 million at January 31, 2010, compared to $75.5 million last quarter and $74.5 million a year earlier. The general allowance as a percentage of risk-weighted loans was 70 basis points, down from 73 basis points last quarter and 74 basis points one year ago.
Non-interest Expenses
Effective execution of CWB's strategic plan, focused on long-term and sustainable growth, will continue to require increased spending in certain areas. Significant expenditures relate to additional staff complement as well as expanded premises and technology upgrades. Spending in these areas is an integral part of the Bank's commitment to maximize shareholder value over the long-term and is expected to provide material benefits in future periods. A key technology highlight for the first quarter was the successful implementation of an integrated general ledger system that is expected to provide significant efficiencies going forward. In support of management's objective to enhance the Bank's market presence, two additional full-service banking branches are expected to open late in 2010.
First quarter non-interest expenses of $40.2 million increased 11% ($3.8 million) compared to last year. Within non-interest expenses, salary and benefit costs were up 11% ($2.6 million) with the increase mainly attributed to increased staff complement, additional stock-based compensation charges and annual salary increments. Premises and equipment expenses were up $1.0 million in the aggregate over the same quarter last year while other expenses increased $0.4 million. Non-interest expenses declined $1.3 million compared to the prior quarter mainly resulting from a decrease in salary expense related to restricted share units reflecting CWB's lower average share price in the quarter. Lower advertising expense compared to the prior quarter also contributed to the change in non-interest expenses and resulted from a planned delay in marketing initiatives.
The first quarter efficiency ratio (teb), which measures non-interest expenses as a percentage of total revenues (teb), was 40.0%, compared to 47.3% last year and 46.1% in the previous quarter. The significant improvement reflects the combined positive impact on total revenues due to a strong recovery in net interest margin, increased other income, including gains on sale of securities, and ongoing loan growth. The first quarter efficiency ratio (teb) was well within the fiscal 2010 target of 48% or better. While the Bank will continue to closely manage discretionary spending, the exceptional first quarter efficiency ratio (teb) is not considered a sustainable benchmark. Planned expenditures coupled with expectations for declining gains on sale of securities will likely lead to a higher efficiency ratio for the remainder of the year. That being said, the annual efficiency ratio (teb) is expected to be better than the fiscal 2010 target of 48%.
Income Taxes
The first quarter income tax rate (teb) was 29.3%, down 190 basis points from one year ago, while the tax rate before the teb adjustment was 25.9%, or 220 basis points lower. The decrease from last year reflects the 100 basis point decrease in the basic federal income tax rate effective July 31, 2009, and the 50 basis point decrease in BC's provincial tax rate effective January 1, 2010. CWB's expected income tax rate (teb) for fiscal 2010 is 28.8%, or 24.6% before the teb adjustment.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (OCI), all net of income taxes, and totaled $42.7 million for the first quarter, compared to $30.8 million in the same period last year. As previously noted, first quarter net income was up 56% ($14.4 million) compared to one year ago. This increase was partly offset by lower OCI as a result of lower unrealized gains on derivative instruments designated as cash flow hedges, which reflects market value fluctuations related to changes in both market credit spreads and interest rates, as well as shifts in the interest rate curve.
Balance Sheet
Total assets were relatively unchanged from the prior quarter and increased 7% ($735 million) in the past year to reach $11,642 million.
Cash and Securities
Cash, securities and securities purchased under resale agreements totaled $2,170 million at January 31, 2010, compared to $2,189 million last quarter and $1,724 million one year ago. The unrealized gain recorded on the balance sheet at January 31, 2010 was $29.7 million, compared to $24.8 million last quarter and an unrealized loss of $13.2 million as at January 31, 2009. The change in unrealized gains and losses compared to January 31, 2009 is primarily attributed to a market value improvement in the Bank's preferred share portfolio; unrealized gains in this portfolio totaled $13.7 million as at January 31, 2010, compared to unrealized losses of $25.8 million one year ago. The cash and securities portfolio is mainly comprised of high quality debt instruments that are not held for trading purposes. 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 $6.5 million, compared to $4.1 million in the previous quarter and $8.1 million in the same quarter last year. Gains on sale of securities in both the current and prior periods mainly resulted from investment strategies and unusual market conditions that allowed the Bank to capitalize on opportunities to realize gains while maintaining relatively comparable yields on reinvestment in other high quality investment grade securities. While further gains on sale of securities are expected to occur, based on management's current view, the quarterly dollar amount of these gains is likely to reduce as the year progresses.
Treasury Management
High liquidity levels have been maintained since August 2007 in response to disruptions and related uncertainties in financial markets. Many of the foregoing uncertainties have now subsided and the Bank is now reducing liquidity to levels that are considered more normal. Compared to prior periods where liquidity levels were exceptionally high, this reduction has had a positive impact on net interest margin. Average liquidity balances, net of securities sold under repurchase agreements, were up compared to the same quarter last year, but lower than the previous quarter. High average cash and securities balances in the current period primarily reflect the anticipated settlement of the purchase of National Leasing. Comparatively slower loan growth also contributed to increased liquidity compared to both the Bank's internal target and a year earlier. Average liquidity is expected to decrease further in future periods, although elevated levels may be maintained compared to what would be held under more robust economic and market environments.
Loans
Total loans grew $46 million in the quarter and $289 million (3%) in the past twelve months to reach $9,282 million. The impact of ongoing economic uncertainty and both expected and unexpected repayments (payouts and pay downs) on existing loans continued to constrain growth. Measured by lending sector, personal and general commercial portfolios experienced strong growth for the quarter, while equipment financing and energy loans showed significant declines. Growth in real estate loans was relatively flat compared to the prior quarter. Year-over-year loan growth shows a similar sector trend. The equipment financing portfolio will benefit in the second quarter from the acquisition of National Leasing. On a pro forma basis, including the on-balance sheet assets of National Leasing, consolidated year-to-date loan growth as at February 1, 2010 would have been approximately 4%.
Looking forward, loan growth is expected to remain constrained as moderated economic activity in Western Canada continues, particularly in the Bank's real estate construction and equipment financing portfolios. Construction loans are relatively short in duration and there are now fewer quality lending opportunities in this area. The equipment financing portfolio also has a short duration with loans fully repaid over a period of three to five years. The substantial reduction in natural gas prices has had a significant negative impact on conventional exploration activity and continues to adversely affect cash flows for companies involved in oil and gas services, particularly in Alberta. On a more positive note, crude oil prices have remained relatively stable of late and exploration and production companies appear to be increasing their capital budgets tied to conventional oil exploration. There is also clear evidence supporting increased capital investment in both the Alberta oil sands and the shale gas deposits in BC. CWB continues to believe that Western Canada's resource-based economies are poised for a comparatively faster recovery than the rest of Canada once major global economies begin to expand. While management believes CWB's 2010 target for double-digit loan growth is still attainable, the absence of a sustained economic recovery will make the achievement of this goal a challenge.
Loans in the Bank's alternative mortgage business, Optimum Mortgage (Optimum), increased 10% in the quarter and 26% over the past twelve months to reach $615 million. Real estate values and residential sales activity in Western Canada continued to show good resilience. Optimum's newly established offering of higher ratio mortgages insured by either the Canada Mortgage and Housing Corporation or Genworth Financial Canada showed positive results and management expects insured mortgages will continue to become a larger component of this portfolio over time. For uninsured mortgages, which currently represent approximately 73% of Optimum's total portfolio, 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 large majority of all Optimum mortgages carry a fixed interest rate with the principal amortized over 25 years or less. Management remains committed to grow this business over time as it continues to produce strong returns while maintaining an acceptable risk profile.
Deposits
Total branch deposits, including those raised by Canadian Western Trust Company (CWT), were up 10% ($536 million) compared to a year earlier, but down 1% ($30 million) from the previous quarter. The demand and notice component within branch deposits was up 37% ($876 million) compared to the same time last year and 3% ($97 million) from last quarter. The significant growth in demand and notice deposits supports management's objective to further enhance and diversify the Bank's core funding sources and primarily reflects CWT's appointment last year as trustee for a major Canadian investment dealer. The Internet-based division of the Bank named Canadian Direct Financial(TM) has shown good success and management is optimistic about its ongoing potential to provide a valued source of deposits.
Total deposits at quarter end were $10,004 million, up 4% ($387 million) from the previous quarter and 5% ($481 million) over the past year. Total branch deposits measured as a percentage of total deposits were 61% at January 31, 2010, compared to 64% in the previous quarter and 58% a year earlier. Compared to January 31, 2009, the increase in branch-raised deposits as a percentage of total deposits reflects very strong growth in the demand and notice component that more than offset a 2% ($92 million) increase in fixed rate term deposits raised through the deposit broker network. Demand and notice deposits represented 32% of total deposits at quarter end, compared to 33% in the previous quarter and 25% a year earlier.
Other Assets and Other Liabilities
Other assets at January 31, 2010 totaled $190 million, compared to $211 million last quarter and $190 million one year ago. Other liabilities at quarter end were $302 million, compared to $657 million the previous quarter and $304 million last year. The decrease in other liabilities compared to the prior quarter reflects the absence of securities sold under repurchase agreements which are sometimes used for short-term cash management purposes.
Off-Balance Sheet
Off-balance sheet items include trust assets under administration and assets under management. Trust assets under administration totaled $5,462 million at January 31, 2010, compared to $5,467 million last quarter and $4,141 million one year ago. Assets under management were $881 million at quarter end, compared to $878 million last quarter and $810 million one year ago. Other off-balance sheet items are comprised 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 82 and 88 respectively in the Bank's 2009 Annual Report.
Capital Management
At January 31, 2010, CWB's total capital adequacy ratio, which measures regulatory capital as a percentage of risk-weighted assets, was 15.1%, down from 15.4% at October 31, 2009, but up from 13.0% a year earlier. The lower total capital adequacy ratio compared to the prior quarter reflects the redemption of $60.0 million of subordinated debentures on November 20, 2009. The Tier 1 ratio at quarter end was 11.6%, compared to 11.3% last quarter and 8.7% at the same time last year. Compared to one year ago, CWB's Tier 1 capital increased with the issuance of $209.8 million preferred units and the retention of earnings, net of dividends. The higher Tier 1 ratio compared to the prior quarter reflects the retention of earnings, net of dividends, slightly offset by growth in risk weighted assets. The Bank's acquisition of National Leasing is expected to have a modest negative impact on the Bank's capital adequacy ratios.
CWB expects to remain very well capitalized. The ongoing retention of earnings will support capital requirements associated with the anticipated achievement of the 2010 minimum performance targets. The Bank's very strong capital ratios are currently above management's targeted thresholds and this position of strength provides considerable flexibility to pursue strategic growth opportunities. Management continues to evaluate alternatives to deploy capital for the long-term benefit of CWB shareholders, which includes the potential for further strategic acquisitions.
In the fall of 2009, the Office of the Superintendent of Financial Institutions Canada (OSFI) indicated to the Canadian financial institution industry that amendments would be forthcoming to the capital adequacy guidelines as a result of a global review of the adequacy of capital levels during the global financial crisis. In December 2009, the Basel Committee on Banking Supervision (the Committee) issued a Consultative Document entitled Strengthening the Resilience of the Banking Sector for comment by April 16, 2010. The document as written represents a substantial change to the current guideline and has a strong emphasis on the quality and characteristics of Tier 1 capital. The Committee did not provide any indication as to minimum regulatory capital levels as they expect significant feedback and will study the quantitative impact of the draft framework before calibrating the standards. The Committee's initial time line would result in new standards being issued by the end of 2010 to be phased in by the end of 2012. It is too early to predict the impact of the new standards on CWB's capital ratios. That being said, CWB has a very strong capital position and expects implementation of the final set of standards should be relatively easy to manage given the lack of complexity in the Bank's current composition of regulatory capital, including an already strong component of tangible common equity.
Further information relating to the Bank's capital position is provided in Note 15 to the quarterly financial statements as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2009.
Book value per common share at January 31, 2010 was $12.67 compared to $12.16 last quarter and $11.10 one year ago.
Common shareholders received a quarterly cash dividend of $0.11 per common share on January 8, 2010. On March 3, 2010, the Board of Directors declared a quarterly cash dividend of $0.11 per common share payable on April 1, 2010 to shareholders of record on March 18, 2010. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on April 30, 2010 to shareholders of record on April 21, 2010.
Changes in Accounting Policies
There were no new significant accounting policies adopted during the quarter for purposes of presenting the Bank's financial statements under Canadian generally accepted accounting principles.
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.
During 2008, the Bank commenced 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 and the design and planning phases are complete, and the solution development phase is expected to be completed by the end of fiscal 2010. Further information on the Bank's transition plan is provided on pages 56 to 58 of the 2009 Annual Report.
The impact of the transition to IFRS on the Bank's consolidated financial statements for current standards is not yet determinable. CWB continues to monitor the International Accounting Standards Board's proposed changes to standards during Canada's transition to IFRS. These proposed changes may have a significant impact on the Bank's implementation plan and future financial statements.
Controls and Procedures
There were no changes in the Bank's internal controls over financial reporting that occurred during the quarter ended January 31, 2010 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.
National Leasing was acquired subsequent to quarter end and 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 the controls, policies and procedures of this entity.
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 26, 2010, there were 66,054,037 common shares outstanding. Also outstanding were employee stock options, which are or will be exercisable for up to 4,640,104 common shares for maximum proceeds of $88.1 million and 14,935,968 warrants that are each exercisable until March 3, 2014 to purchase one common share in the Bank at a price of $14.00.
Dividend Reinvestment Plan
The Bank's common shares (TSX: CWB) and preferred shares (TSX: CWB.PR.A) are currently deemed eligible to participate in CWB's dividend reinvestment plan (the "Plan"). The Plan provides holders of the Bank's eligible shares the opportunity to direct cash dividends toward the purchase of common shares. Further details for the Plan are available on the Bank's website at http://www.cwbankgroup.com/investor_relations/drip.htm. At the current time, for the purposes of the Plan, the Bank has elected to issue common shares from treasury at a 2% discount from the average market price (as defined in the Plan).
Normal Course Issuer Bid
On January 18, 2010, CWB received approval from the Toronto Stock Exchange to initiate a Normal Course Issuer Bid (NCIB) and purchase, for cancellation, up to 748,058 of its warrants. The NCIB commenced January 20, 2010 and will expire January 19, 2011. From January 20 to January 31, 2010, the Bank purchased and cancelled 4,500 warrants that had an average purchase price per warrant of $7.33; the aggregate amount of the warrant purchases was charged to retained earnings. A copy of the NCIB news release is available on the Bank's website and on SEDAR at www.sedar.com.
Summary of Quarterly Financial Information
2010 2009
------------ --------------------------------------
($ thousands) Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Total revenues (teb) $ 100,672 $ 90,099 $ 85,538 $ 75,382
Total revenues 98,109 87,702 83,349 73,707
Net income 40,035 30,357 28,729 21,580
Earnings per
common share
Basic 0.57 0.42 0.39 0.30
Diluted 0.52 0.39 0.38 0.30
Total assets
($ millions) 11,642 11,636 11,331 11,450
-------------------------------------------------------------------------
2009 2008
------------ --------------------------------------
($ thousands) Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Total revenues (teb) $ 76,947 $ 74,059 $ 76,375 $ 73,754
Total revenues 75,361 72,519 74,933 72,402
Net income 25,619 24,485 26,327 25,302
Earnings per
common share
Basic 0.40 0.39 0.42 0.40
Diluted 0.40 0.38 0.41 0.39
Total assets
($ millions) 10,907 10,601 10,057 10,038
-------------------------------------------------------------------------
The financial results for each of the last eight quarters are summarized above. In general, CWB's performance reflects a relatively consistent trend although the second quarter contains three fewer revenue earning days, or two fewer days in a leap year.
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.
During the fourth quarter of 2008 and throughout fiscal 2009 the Bank's quarterly net interest income was negatively impacted by compression of the net interest margin that mainly resulted from consecutive reductions in the prime lending interest rate, coupled with significantly higher deposit costs and other spin-off effects of the global financial crisis. Gains on sale of securities, reflected in other income, were unusually high during the same period also mainly due to factors associated with the financial crisis, including a steep interest rate curve and wide credit spreads that allowed the Bank to capitalize on investment strategies. In the first quarter of fiscal 2010, net interest margin recovered to more typical levels achieved before the onset of the global financial crisis. Quarterly results can also fluctuate due to the recognition of periodic income tax items.
For details on variations between the prior quarters, refer to the summary of quarterly results section of the Bank's MD&A for the year ended October 31, 2009 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 2009 Annual Report and audited consolidated financial statements for the year ended October 31, 2009 are available on both SEDAR and the Bank's website.
Results by Business Segment
CWB operates in two business segments: 1) banking and trust, and 2) insurance. Segmented information is also provided in Note 14 of the unaudited interim consolidated financial statements.
Banking and trust
Operations of the banking and trust segment include commercial and retail banking services, as well as personal and corporate trust services provided through Canadian Western Trust Company (CWT) and Valiant Trust Company (Valiant). The banking and trust segment also includes wealth management services provided through Adroit Investment Management Ltd. (Adroit) and will include the operations of newly acquired National Leasing Group Inc. (National Leasing), effective February 1, 2010.
Record net income of $36.7 million increased 48% ($11.9 million) compared to the same quarter last year mainly driven by a 57 basis point recovery in net interest margin (teb) to 2.54%. The margin recovery combined with ongoing loan growth increased net interest income (teb) by 37% ($19.5 million) and marked a return to historical levels earned before the onset of the global financial crisis. First quarter other income grew 2% over a year earlier as strong fee-based income, including a 27% ($1.5 million) increase in credit related fee income, offset a $1.6 million reduction in gains on sale of securities. The quarterly provision for credit losses was up 10% ($0.3 million) over the prior year and represented 16 basis points of average loans. Lingering effects related to the recessionary economic climate continued to constrain loan growth. The strong recovery in net interest margin (teb) compared to a year earlier mainly resulted from much lower deposit costs, an improved deposit and securities mix, and more favourable spreads on both new and renewed loans. The quarterly efficiency ratio (teb), which measures non-interest expense as a percentage of total revenues (teb), was 40.4%, compared to 46.2% last year. Non-interest expenses increased 11% ($3.7 million) over the same quarter last year and the significant improvement in the efficiency ratio was entirely attributed to growth in revenues due to the factors already noted.
Compared to the prior quarter, earnings were up 34% ($9.2 million) reflecting the positive revenue impact of a 22 basis point recovery in net interest margin (teb), a 21% ($3.6 million) increase in other income and modest loan growth. Total revenues (teb) grew 12% ($9.8 million) and included $6.2 million higher net interest income (teb). Gains on sale of securities and credit related fee income were up $2.4 million and $1.1 million, respectively. Non-interest expense declined $1.4 million compared to last quarter and contributed to a 640 basis point improvement in the efficiency ratio (teb). The provision for credit losses increased $0.3 million over the prior quarter.
For the three months ended
-------------------------------------- Change from
January 31 October 31 January 31 January 31
($ thousands) 2010 2009 2009 2009
-------------------------------------------------------------------------
Net interest income
(teb) $ 72,619 $ 66,387 $ 53,101 37%
Other income 20,616 17,019 20,218 2
-------------------------------------------------------------------------
Total revenues (teb) 93,235 83,406 73,319 27
Provision for
credit losses 3,713 3,393 3,369 10
Non-interest expenses 37,627 38,997 33,910 11
Provision for
income taxes (teb) 15,129 13,490 11,151 36
Non-controlling
interest in
subsidiary 76 59 67 13
-------------------------------------------------------------------------
Net income $ 36,690 $ 27,467 $ 24,822 48%
-------------------------------------------------------------------------
Efficiency ratio (teb) 40.4% 46.8% 46.2% (580) bp
Efficiency ratio 41.4 48.0 47.2 (580)
Net interest
margin (teb) 2.54 2.32 1.97 57
Net interest margin 2.46 2.24 1.91 55
Average loans
(millions)(1) $ 9,253 $ 9,161 $ 8,855 4%
Average assets
(millions)(1) 11,317 11,342 10,711 6
-------------------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following Financial
Highlights table.
(1) Assets are disclosed on an average daily balance basis.
Insurance
The insurance segment is comprised of the operations of Canadian Direct Insurance Incorporated (Canadian Direct or CDI), which provides auto and home insurance to individuals in BC and Alberta.
Canadian Direct reported record quarterly net income of $3.3 million representing a $2.5 million increase from a year ago. Strong results included a positive $1.9 million before tax ($1.3 million after tax) contribution from Canadian Direct's share of the Alberta auto risk sharing pools (the Pools), an 8% increase in net earned premiums and improved claims experience. Excluding the impact of the Pools on first quarter results for both years, net income was up $1.1 million. Growth in net earned premiums was mainly due to increased policies and higher average premiums per policy in the home product lines of business. Improved claims experience compared to the first quarter of 2009 mainly reflects a significant drop in the loss ratio for the BC home product line which was adversely impacted last year by severe storm activity. The Pools' results in the quarter included a $1.5 million decrease in unpaid claims reserves that were initially reserved in the fourth quarter of fiscal 2008. The favourable adjustment was specifically related to a December 2009 decision by the Supreme Court of Canada that denied leave to appeal the earlier ruling regarding the cap on minor injuries suffered in an automobile accident.
Net income increased $0.5 million compared to the prior quarter as the Pools' positive results more than offset the seasonal aspect of the business where the first quarter is typically affected by a combination of higher claims experience due to winter weather and slower new policy growth. Barring any severe weather or other catastrophe type events, the maintenance of sound underwriting practices and increased policy sales during the busier spring and summer seasons should support continued strong results through the remainder of fiscal 2010.
For the three months ended
-------------------------------------- Change from
January 31 October 31 January 31 January 31
($ thousands) 2010 2009 2009 2009
-------------------------------------------------------------------------
Net interest income
(teb) $ 1,687 $ 1,625 $ 1,495 13%
-------------------------------------------------------------------------
Other income (net)
Net earned premiums 27,331 27,072 25,215 8
Commissions and
processing fees 618 697 654 (6)
Net claims and
adjustment expenses (16,990) (17,559) (18,651) (9)
Policy acquisition
costs (5,289) (5,199) (5,106) 4
-------------------------------------------------------------------------
Insurance
revenue (net) 5,670 5,011 2,112 168
Gains on sale
of securities 80 57 21 282
-------------------------------------------------------------------------
Total revenues
(net) (teb) 7,437 6,693 3,628 105
Non-interest expenses 2,621 2,576 2,495 5
Provision for income
taxes (teb) 1,471 1,227 336 338
-------------------------------------------------------------------------
Net income $ 3,345 $ 2,890 $ 797 320%
-------------------------------------------------------------------------
Policies outstanding
(No.) 177,272 175,662 168,642 5
Gross written
premiums $ 24,332 $ 31,537 $ 23,103 5
Claims loss ratio(1) 62% 65% 74% (1,200) bp
Expense ratio(2) 27 26 28 (100)
Combined ratio(3) 89 91 102 (1,300)
Alberta auto risk
sharing pools impact
on net income
before tax $ 1,913 $ (722) $ (158) nm%
Average total assets
(millions) 214 212 188 14
-------------------------------------------------------------------------
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 2010 Minimum Targets and Outlook
The minimum performance targets established for the 2010 fiscal year together with CWB's actual performance are presented in the table below:
---------------------------
2010 2010
Minimum Year-to-date
Targets Performance(1)
-------------------------------------------------------------------------
Net income growth(2) 12% 56%
-------------------------------------------------------------------------
Total revenue (teb) growth 12% 31%
-------------------------------------------------------------------------
Loan growth 10% 3%
-------------------------------------------------------------------------
Provision for credit losses as a percentage
of average loans 0.15% - 0.20% 0.16%
-------------------------------------------------------------------------
Efficiency ratio (teb) 48% 40.0%
-------------------------------------------------------------------------
Return on common equity(3) 13% 18.0%
-------------------------------------------------------------------------
Return on assets(4) 0.90% 1.25%
-------------------------------------------------------------------------
(1) 2010 year-to-date performance for earnings and revenue growth is the
current year results over the same period in the prior year, loan
growth is the increase over the past twelve months, and performance
for ratio targets is the current year-to-date results annualized.
(2) Net income, before preferred share dividends.
(3) Return on common equity calculated as annualized net income after
preferred share dividends divided by average common shareholders'
equity.
(4) Return on assets calculated as annualized net income after preferred
share dividends divided by average total assets.
Lower deposit costs and a favourable shift in the deposit mix, together with strategies implemented in fiscal 2009 to help offset margin pressures, have resulted in a strong recovery in net interest margin to more normal historical levels in the first quarter. The Bank's record performance was additionally augmented by a continued high level of gains on sale of securities. Planned expenditures related to ongoing execution of CWB's strategic plan and the expected decline in the level of gains on sale of securities means that the efficiency ratio (teb) of 40.0% is not a sustainable new benchmark. That being said, exceptional first quarter results put the Bank in an excellent position to better the 48% annual target. Credit quality is sound despite an increase in gross impaired loans and management currently remains comfortable with the 2010 target range for provisions for credit losses. The acquisition of National Leasing will boost loan growth and the existing pipeline for new lending opportunities is encouraging. Management believes the achievement of double-digit loan growth for the year is still attainable, but will be challenging in the absence of a sustained economic recovery.
CWB is positioned early in the year to surpass its fiscal 2010 minimum targets, except for loan growth, by a considerable margin. The Bank intends to continue to build market share while maintaining its focus on high quality, secured loans that offer a fair and profitable return on investment. Deals will not be done for the sole purpose of increasing loan growth. Economic fundamentals in Western Canada are expected to remain favourable relative to the rest of Canada and management remains very confident about its proven business plan and future growth opportunities within the Bank's core geographic footprint. All of the Bank's subsidiaries also have excellent growth prospects and the economic recovery should lead to additional opportunities in this regard, particularly for National Leasing's niche market of commercial equipment leasing for small and mid-size transactions. The overall outlook for 2010 and beyond is positive.
This management's discussion and analysis is dated March 3, 2010.
Taxable Equivalent Basis (teb)
Most banks analyze revenue on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other banks. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.
Non-GAAP Measures
Taxable equivalent basis, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, tangible common equity to risk-weighted assets, Tier 1 and total capital adequacy ratios, average balances, claims loss ratio, expense ratio and combined ratio do not have standardized meanings prescribed by generally accepted accounting principles (GAAP) and therefore may not be comparable to similar measures presented by other financial institutions. The non-GAAP measures used in this MD&A are calculated as follows:
- taxable equivalent basis - described above;
- return on common shareholders' equity - net income less preferred
share dividends divided by average shareholder's equity;
- return on assets - net income less preferred share dividends divided
by average total assets;
- efficiency ratio - non-interest expenses divided by total revenues
(net interest income plus other income);
- net interest margin - net interest income divided by average total
assets;
- tangible common equity to risk-weighted assets - shareholders' equity
less subsidiary goodwill divided by risk-weighted assets, calculated
in accordance with guidelines issued by the Office of the
Superintendent of Financial Institutions Canada (OSFI);
- Tier 1 and total capital adequacy ratios - in accordance with
guidelines issued by OSFI;
- average balances - average daily balances;
- claims loss ratio - net insurance claims and adjustment expenses as a
percentage of net earned premiums;
- expense ratio - policy acquisition costs and non-interest expenses
net of commissions and processing fees as a percentage of net earned
premiums; and
- combined ratio - sum of the claims loss and expense ratios.
Forward-looking Statements
From time to time, Canadian Western Bank (the Bank) makes written and verbal forward-looking statements. Statements of this type are included in the Annual Report and reports to shareholders and may be included in filings with Canadian securities regulators or in other communications such as press releases and corporate presentations. Forward-looking statements include, but are not limited to, statements about the Bank's objectives and strategies, targeted and expected financial results and the outlook for the Bank's businesses or for the Canadian economy. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "may increase", "may impact" and other similar expressions, or future or conditional verbs such as "will", "should", "would" and "could".
By their very nature, forward-looking statements involve numerous assumptions. A variety of factors, many of which are beyond the Bank's control, may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These factors include, but are not limited to, general business and economic conditions in Canada including the volatility and lack of liquidity in financial markets, fluctuations in interest rates and currency values, changes in monetary policy, changes in economic and political conditions, regulatory and legal developments, the level of competition in the Bank's markets, the occurrence of weather-related and other natural catastrophes, changes in accounting standards and policies, the accuracy of and completeness of information the Bank receives about customers and counterparties, the ability to attract and retain key personnel, the ability to complete and integrate acquisitions, reliance on third parties to provide components of the Bank's business infrastructure, changes in tax laws, technological developments, unexpected changes in consumer spending and saving habits, timely development and introduction of new products, and management's ability to anticipate and manage the risks associated with these factors. It is important to note that the preceding list is not exhaustive of possible factors.
These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause the Bank's actual results to differ materially from the expectations expressed in such forward looking statements. Unless required by securities law, the Bank does not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy in 2010 and how it will affect CWB's businesses are material factors the Bank considers when setting its objectives. In setting minimum performance targets for fiscal 2010, management's expectations assumed: moderate economic growth in Canada aided by positive relative performance in the four western provinces; stable or slightly higher energy and commodity prices; sound credit quality with actual losses remaining within the Bank's range of acceptable levels; modest inflationary pressures; and, an improved net interest margin resulting from lower deposit costs, a stable prime lending interest rate, favourable yields on both new lending facilities and renewed accounts and relatively stable investment returns reflecting high quality assets held in the securities portfolio, partially offset by a reduction in the level of gains on the sale of securities compared to fiscal 2009.
-------------------------------------------------------------------------
Consolidated Statements of Income
-------------------------------------------------------------------------
For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except January 31 October 31 January 31 January 31
per share amounts) 2010 2009 2009 2009
-------------------------------------------------------------------------
Interest Income
Loans $ 116,841 $ 116,042 $ 119,268 (2)%
Securities 10,938 11,411 11,212 (2)
Deposits with
regulated financial
institutions 2,104 2,393 3,537 (41)
-------------------------------------------------------------------------
129,883 129,846 134,017 (3)
-------------------------------------------------------------------------
Interest Expense
Deposits 53,570 58,963 75,740 (29)
Subordinated
debentures 4,570 5,268 5,267 (13)
-------------------------------------------------------------------------
58,140 64,231 81,007 (28)
-------------------------------------------------------------------------
Net Interest Income 71,743 65,615 53,010 35
Provision for Credit
Losses (Note 5) 3,713 3,393 3,369 10
-------------------------------------------------------------------------
Net Interest Income
after Provision for
Credit Losses 68,030 62,222 49,641 37
-------------------------------------------------------------------------
Other Income
Credit related 7,278 6,150 5,743 27
Insurance, net
(Note 2) 5,670 5,011 2,112 168
Trust and wealth
management services 4,470 4,139 3,913 14
Retail services 2,016 1,865 1,844 9
Gains on sale of
securities 6,497 4,103 8,143 (20)
Foreign exchange
gains 435 647 555 (22)
Other - 172 41 (100)
-------------------------------------------------------------------------
26,366 22,087 22,351 18
-------------------------------------------------------------------------
Net Interest and Other
Income 94,396 84,309 71,992 31
-------------------------------------------------------------------------
Non-Interest Expenses
Salaries and
employee benefits 26,390 26,704 23,837 11
Premises and
equipment 7,028 6,996 6,028 17
Other expenses 6,520 7,373 6,149 6
Provincial capital
taxes 310 500 391 (21)
-------------------------------------------------------------------------
40,248 41,573 36,405 11
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 54,148 42,736 35,587 52
Income Taxes 14,037 12,320 9,901 42
-------------------------------------------------------------------------
40,111 30,416 25,686 56
Non-Controlling
Interest in
Subsidiary 76 59 67 13
-------------------------------------------------------------------------
Net Income $ 40,035 $ 30,357 $ 25,619 56 %
-------------------------------------------------------------------------
Preferred share
dividends (Note 9) $ 3,802 $ 3,802 $ - nm %
Net income available
to common
shareholders $ 36,233 $ 26,555 $ 25,619 41
-------------------------------------------------------------------------
Average number of
common shares
(in thousands) 63,925 63,828 63,465 1
Average number of
diluted common shares
(in thousands) 70,090 68,683 63,667 10
-------------------------------------------------------------------------
Earnings Per Common
Share
Basic $ 0.57 $ 0.42 $ 0.40 43
Diluted $ 0.52 $ 0.39 $ 0.40 30
-------------------------------------------------------------------------
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Balance Sheets
-------------------------------------------------------------------------
As at As at As at Change from
(unaudited) January 31 October 31 January 31 January 31
($ thousands) 2010 2009 2009 2009
-------------------------------------------------------------------------
Assets
Cash Resources
Cash and non-
interest bearing
deposits with
financial
institutions $ 18,728 $ 17,447 $ 31,984 (41)%
Interest bearing
deposits with
regulated financial
institutions
(Note 3) 266,158 266,980 430,594 (38)
Cheques and other
items in transit 9,280 12,677 7,461 24
-------------------------------------------------------------------------
294,166 297,104 470,039 (37)
-------------------------------------------------------------------------
Securities (Note 3)
Issued or
guaranteed by
Canada 930,048 854,457 338,844 174
Issued or
guaranteed by
a province or
municipality 96,999 253,143 455,759 (79)
Other securities 828,737 783,809 444,166 87
-------------------------------------------------------------------------
1,855,784 1,891,409 1,238,769 50
-------------------------------------------------------------------------
Securities Purchased
Under Resale
Agreements 20,000 - 15,000 33
-------------------------------------------------------------------------
Loans (Notes 4 and 6)
Residential
mortgages 2,308,916 2,282,475 2,233,841 3
Other loans 7,045,834 7,029,177 6,834,088 3
-------------------------------------------------------------------------
9,354,750 9,311,652 9,067,929 3
Allowance for
credit losses
(Note 5) (72,570) (75,459) (74,476) (3)
-------------------------------------------------------------------------
9,282,180 9,236,193 8,993,453 3
-------------------------------------------------------------------------
Other
Land, buildings and
equipment 41,248 39,252 31,195 32
Goodwill 9,360 9,360 9,360 -
Other intangible
assets 6,152 6,465 7,412 (17)
Insurance related 56,583 55,932 52,011 9
Derivative related
(Note 7) 802 2,334 12,852 (94)
Other assets 75,359 97,823 76,981 (2)
-------------------------------------------------------------------------
189,504 211,166 189,811 -
-------------------------------------------------------------------------
Total Assets $11,641,634 $11,635,872 $10,907,072 7 %
-------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Deposits
Payable on demand $ 399,888 $ 359,176 $ 362,394 10 %
Payable after notice 2,820,033 2,778,601 1,982,001 42
Payable on a fixed
date 6,679,000 6,374,461 7,073,702 (6)
Deposit from
Canadian Western
Bank Capital Trust 105,000 105,000 105,000 -
-------------------------------------------------------------------------
10,003,921 9,617,238 9,523,097 5
-------------------------------------------------------------------------
Other
Cheques and other
items in transit 33,498 41,964 30,432 10
Insurance related 137,424 145,509 135,565 1
Derivative related
(Note 7) 64 74 97 (34)
Securities sold
under repurchase
agreements - 300,242 - -
Other liabilities 131,085 169,346 138,278 (5)
-------------------------------------------------------------------------
302,071 657,135 304,372 (1)
-------------------------------------------------------------------------
Subordinated Debentures
Conventional (Note 8) 315,000 375,000 375,000 (16)
-------------------------------------------------------------------------
Shareholders' Equity
Preferred shares
(Note 9) 209,750 209,750 - nm
Common shares
(Note 9) 227,716 226,480 222,010 3
Contributed surplus 20,442 19,366 15,759 30
Retained earnings 540,951 511,784 466,841 16
Accumulated other
comprehensive
income (loss) 21,783 19,119 (7) nm
-------------------------------------------------------------------------
1,020,642 986,499 704,603 45
-------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $11,641,634 $11,635,872 $10,907,072 7 %
-------------------------------------------------------------------------
Contingent Liabilities
and Commitments
(Note 11)
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
-------------------------------------------------------------------------
For the three months ended
-----------------------------
(unaudited) January 31 January 31
($ thousands) 2010 2009
-------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $ 511,784 $ 448,203
Net income 40,035 25,619
Dividends - Preferred shares (3,802) -
- Common shares (7,033) (6,981)
Warrants purchased under normal course
issuer bid (33) -
-------------------------------------------------------------------------
Balance at end of period 540,951 466,841
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period 19,119 (5,203)
Other comprehensive income 2,664 5,196
-------------------------------------------------------------------------
Balance at end of period 21,783 (7)
-------------------------------------------------------------------------
Total retained earnings and accumulated
other comprehensive income (loss) 562,734 466,834
-------------------------------------------------------------------------
Preferred Shares (Note 9)
Balance at beginning of period 209,750 -
Issued during the period - -
-------------------------------------------------------------------------
Balance at end of period 209,750 -
-------------------------------------------------------------------------
Common Shares (Note 9)
Balance at beginning of period 226,480 221,914
Issued under dividend reinvestment plan 758 -
Issued on exercise of options 304 60
Transferred from contributed surplus on
exercise or exchange of options 130 36
Issued on exercise of warrants 44 -
-------------------------------------------------------------------------
Balance at end of period 227,716 222,010
-------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 19,366 14,234
Amortization of fair value of options 1,206 1,561
Transferred to common shares on exercise
or exchange of options (130) (36)
-------------------------------------------------------------------------
Balance at end of period 20,442 15,759
-------------------------------------------------------------------------
Total Shareholders' Equity $ 1,020,642 $ 704,603
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
-------------------------------------------------------------------------
For the three months ended
-----------------------------
(unaudited) January 31 January 31
($ thousands) 2010 2009
-------------------------------------------------------------------------
Net Income $ 40,035 $ 25,619
-------------------------------------------------------------------------
Other Comprehensive Income, net of tax
Available-for-sale securities:
Gains from change in fair value(1) 8,634 9,020
Reclassification to other income(2) (4,909) (5,750)
-------------------------------------------------------------------------
3,725 3,270
-------------------------------------------------------------------------
Derivatives designated as cash flow hedges:
Gains from change in fair value(3) 783 3,436
Reclassification to net interest income(4) (1,844) (1,510)
-------------------------------------------------------------------------
(1,061) 1,926
-------------------------------------------------------------------------
2,664 5,196
-------------------------------------------------------------------------
Comprehensive Income for the Period $ 42,699 $ 30,815
-------------------------------------------------------------------------
(1) Net of income tax expense of $2,793 (2009 - tax expense - $3,753).
(2) Net of income tax benefit of $1,588 (2009 - tax benefit - $2,393).
(3) Net of income tax expense of $336 (2009 - tax expense - $1,550).
(4) Net of income tax benefit of $791 (2009 - tax benefit - $681).
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Cash Flow
-------------------------------------------------------------------------
For the three months ended
-----------------------------
(unaudited) January 31 January 31
($ thousands) 2010 2009
-------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 40,035 $ 25,619
Adjustments to determine net cash flows
Provision for credit losses 3,713 3,369
Depreciation and amortization 2,379 2,126
Amortization of fair value of employee
stock options 1,206 1,561
Future income taxes, net 40 (1,625)
Gain on sale of securities, net (6,497) (8,143)
Accrued interest receivable and payable, net (12,725) 11,800
Current income taxes payable, net (14,074) (3,978)
Other items, net 7,224 (7,562)
-------------------------------------------------------------------------
21,301 23,167
-------------------------------------------------------------------------
Cash Flows from Financing Activities
Deposits, net 386,683 277,378
Securities sold under repurchase
agreements, net (300,242) -
Debentures redeemed (60,000) -
Dividends (10,835) (6,981)
Common shares issued (Note 9) 1,107 60
Warrants purchased under normal course
issuer bid (Note 9) (33) -
-------------------------------------------------------------------------
16,680 270,457
-------------------------------------------------------------------------
Cash Flows from Investing Activities
Interest bearing deposits with regulated
financial institutions, net 122 39,200
Securities, purchased (1,380,990) (739,636)
Securities, sale proceeds 2,041,717 627,894
Securities, matured (618,718) 107,326
Securities purchased under resale
agreements, net (20,000) 62,000
Loans, net (49,700) (372,753)
Land, buildings and equipment (4,062) (1,105)
Business acquisitions - (6,481)
-------------------------------------------------------------------------
(31,631) (283,555)
-------------------------------------------------------------------------
Change in Cash and Cash Equivalents 6,350 10,069
Cash and Cash Equivalents at Beginning of Period (11,840) (1,056)
-------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period* $ (5,490) $ 9,013
-------------------------------------------------------------------------
* Represented by:
Cash and non-interest bearing deposits with
financial institutions $ 18,728 $ 31,984
Cheques and other items in transit
(included in Cash Resources) 9,280 7,461
Cheques and other items in transit
(included in Other Liabilities) (33,498) (30,432)
-------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ (5,490) $ 9,013
-------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Amount of interest paid in the period $ 78,367 $ 70,216
Amount of income taxes paid in the period 28,071 15,504
-------------------------------------------------------------------------
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, 2009. 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, 2009 as set out on pages 66 to 100 of the Bank's 2009
Annual Report. As at January 31, 2010, securities purchased under
reverse resale agreements as reported on the consolidated balance
sheet are now identified as securities sold under repurchase
agreements.
2. 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
2010 2009 2009
---------------------------------------------------------------------
Net earned premiums $ 27,331 $ 27,072 $ 25,215
Commissions and processing fees 618 697 654
Net claims and adjustment
expenses (16,990) (17,559) (18,651)
Policy acquisition costs (5,289) (5,199) (5,106)
---------------------------------------------------------------------
Total, net $ 5,670 $ 5,011 $ 2,112
---------------------------------------------------------------------
3. Securities
Net unrealized gains (losses) reflected on the balance sheet follow:
As at As at As at
January 31 October 31 January 31
2010 2009 2009
---------------------------------------------------------------------
Interest bearing deposits
with regulated financial
institutions $ 6,689 $ 7,390 $ 6,540
Securities
Issued or guaranteed by
Canada 901 1,594 2,452
Issued or guaranteed by a
province or municipality 1,250 2,547 7,112
Other securities 20,887 13,266 (29,288)
---------------------------------------------------------------------
Unrealized gain (losses), net $ 29,727 $ 24,797 $ (13,184)
---------------------------------------------------------------------
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.
4. Loans
The composition of the Bank's loan portfolio by geographic region and
industry sector follow:
British Saskat-
($ millions) Columbia Alberta chewan Manitoba Other Total
-------------------------------------------------------------------------
Loans to
Individuals
Residential
mortga-
ges(2) $ 982 $ 1,023 $ 119 $ 97 $ 88 $ 2,309
Other loans 64 101 15 3 1 184
-------------------------------------------------------------------------
1,046 1,124 134 100 89 2,493
-------------------------------------------------------------------------
Loans to
Businesses
Commercial 779 1,344 88 85 311 2,607
Construction
and real
estate(3) 1,134 1,422 165 71 176 2,968
Equipment
financing 301 682 48 15 129 1,175
Energy - 112 - - - 112
-------------------------------------------------------------------------
2,214 3,560 301 171 616 6,862
-------------------------------------------------------------------------
Total
Loans(1) $ 3,260 $ 4,684 $ 435 $ 271 $ 705 $ 9,355
-------------------------------------------------------------------------
Composition
Percentage
January 31,
2010 35% 50% 5% 3% 7% 100%
October 31,
2009 35% 50% 5% 3% 7% 100%
January 31,
2009 36% 52% 4% 2% 6% 100%
-------------------------------------------------------------------------
January October January
31 2010 31 2009 31 2009
Composi- Composi- Composi-
tion tion tion
Percen- Percen- Percen-
($ millions) tage tage tage
-------------------------------------------
Loans to
Individuals
Residential
mortga-
ges(2) 25% 25% 24%
Other loans 2 2 4
-------------------------------------------
27 27 28
-------------------------------------------
Loans to
Businesses
Commercial 28 27 27
Construction
and real
estate(3) 32 31 29
Equipment
financing 12 13 14
Energy 1 2 2
-------------------------------------------
73 73 72
-------------------------------------------
Total
Loans(1) 100% 100% 100%
-------------------------------------------
Composition
Percentage
January 31,
2010
October 31,
2009
January 31,
2009
-------------------------------------------
(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.
5. Allowance for Credit Losses
The following table shows the changes in the allowance for credit
losses:
For the three months ended For the three months ended
January 31, 2010 October 31, 2009
-----------------------------------------------------------
General General
Allowance Allowance
for for
Specific Credit Specific Credit
Allowance Losses Total Allowance Losses Total
-------------------------------------------------------------------------
Balance at
beginning
of period $ 14,306 $ 61,153 $ 75,459 $ 12,998 $ 61,216 $ 74,214
Provision for
credit losses 5,827 (2,114) 3,713 3,456 (63) 3,393
Write-offs (6,605) - (6,605) (2,164) - (2,164)
Recoveries 3 - 3 16 - 16
-------------------------------------------------------------------------
Balance at
end of
period $ 13,531 $ 59,039 $ 72,570 $ 14,306 $ 61,153 $ 75,459
-------------------------------------------------------------------------
For the three months ended
January 31, 2009
-----------------------------
General
Allowance
for
Specific 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
-------------------------------------------------------------------------
6. 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, 2010
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,533,375 $ 19,128 $ 1,115 $ 18,013
Real estate(1) 3,944,058 79,143 3,220 75,923
Equipment
financing 1,284,931 18,233 2,954 15,279
Commercial 2,592,386 29,898 6,242 23,656
---------------------------------------------------------------------
Total(3) $ 9,354,750 $ 146,402 $ 13,531 132,871
--------------------------------------------------------
General
allowance(2) (59,039)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ 73,832
---------------------------------------------------------------------
As at October 31, 2009
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,452,682 $ 14,805 $ 1,207 $ 13,598
Real estate(1) 3,909,991 76,643 5,611 71,032
Equipment
financing 1,412,344 26,408 6,196 20,212
Commercial 2,536,635 20,088 1,292 18,796
---------------------------------------------------------------------
Total(3) $ 9,311,652 $ 137,944 $ 14,306 123,638
--------------------------------------------------------
General
allowance(2) (61,153)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ 62,485
---------------------------------------------------------------------
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 4,697 70,395
Equipment
financing 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 $ 13,554 94,231
--------------------------------------------------------
General
allowance(2) (60,922)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ 33,309
---------------------------------------------------------------------
(1) Multi-family residential mortgages are included in real estate
loans.
(2) The general allowance for credit risk is not allocated by loan
type.
(3) Gross impaired loans includes foreclosed assets with a carrying
value of $nil (October 31, 2009 - $nil and January 31, 2009 -
$901) which are held for sale.
Outstanding impaired loans, net of allowance for credit losses, by
provincial location of security, are as follows:
As at January 31, 2010 As at October 31, 2009
-----------------------------------------------------------
Gross Net Gross Net
Impaired Specific Impaired Impaired Specific Impaired
Amount Allowance Loans Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 85,873 $ 9,774 $ 76,099 $ 74,847 $ 7,651 $ 67,196
British
Columbia 33,623 2,058 31,565 37,655 5,000 32,655
Saskatche-
wan 1,570 645 925 1,632 609 1,023
Manitoba 684 29 655 337 23 314
Other(2) 24,652 1,025 23,627 23,473 1,023 22,450
---------------------------------------------------------------------
Total $146,402 $ 13,531 132,871 $137,944 $ 14,306 123,638
----------------------------- --------------------
General
allow-
ance(1) (59,039) (61,153)
---------------------------------------------------------------------
Net
impaired
loans
after
general
allow-
ance $ 73,832 $ 62,485
---------------------------------------------------------------------
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
Saskatche-
wan 1,801 609 1,192
Manitoba 388 388 -
Other 505 219 286
---------------------------------------------------------------------
Total $107,785 $ 13,555 94,230
-----------------------------------------------------------
General
allow-
ance(1) (60,922)
---------------------------------------------------------------------
Net
impaired
loans
after
general
allow-
ance $ 33,308
---------------------------------------------------------------------
(1) The general allowance for credit risk is not allocated by
province.
(2) Included in Other is a corporate loan with security that is not
identifiable to a specific province.
During the quarter ended January 31, 2010, interest recognized as
income on impaired loans totaled $117 (2009 - $206).
Gross impaired loans exclude certain past due loans where payment of
interest or principal is contractually in arrears, which are not
classified as impaired. Details of such past due loans that have not
been included in the gross impaired amount are as follows:
As at January 31, 2010
-------------------------------------------------
1 - 30 31 - 60 61 - 90 More than
days days days 90 days Total
---------------------------------------------------------------------
Residential
mortgages $ 6,896 $ 9,375 $ 1,460 $ 1,165 $ 18,896
Other loans 23,232 10,992 1,853 - 36,077
---------------------------------------------------------------------
$ 30,128 $ 20,367 $ 3,313 $ 1,165 $ 54,973
---------------------------------------------------------------------
Total as at
October 31, 2009 $ 27,533 $ 29,272 $ 4,694 $ - $ 61,499
Total as at
January 31, 2009 $ 20,729 $ 24,990 $ 3,489 $ - $ 49,208
---------------------------------------------------------------------
7. Derivative Financial Instruments
For the quarter ended January 31, 2010, a net unrealized after tax
gain of $783 (2009 - $3,436) was recorded in other comprehensive
income for changes in fair value of the effective portion of
derivatives designated as cash flow hedges, and $nil (2009 - $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 quarter ended
January 31, 2010, a net gain after tax of $1,844 (2009 - $1,510) was
reclassified to net income. A net gain of $601 (2009 - $5,801) after
tax recorded in accumulated other comprehensive income (loss) as at
January 31, 2010 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, 2010 As at October 31, 2009
------------------------------------------------------------
Positive Negative Positive Negative
Notional Fair Fair Notional Fair Fair
Amount Value Value Amount Value Value
-------------------------------------------------------------------------
Interest rate
swaps
designated as
cash flow
hedges(1) $145,000 $ 748 $ - $235,000 $ 2,265 $ -
Equity
contracts(2) 2,000 - 12 2,000 - 33
Foreign
exchange
contracts(3) 5,463 52 52 2,496 44 41
Embedded
derivatives
in equity-
linked
deposits(2) n/a 2 - n/a 25 -
Other
forecasted
transactions - - - - - -
-------------------------------------------------------------------------
Derivative
related
amounts $ 802 $ 64 $ 2,334 $ 74
-------------------------------------------------------------------------
As at January 31, 2009
------------------------------
Positive Negative
Notional Fair Fair
Amount Value Value
-------------------------------------------------------------------------
Interest rate
swaps
designated as
cash flow
hedges $513,000 $ 12,848 $ 75
Equity
contracts 4,400 - 169
Foreign
exchange
contracts 4,280 4 37
Embedded
derivatives
in equity-
linked
deposits n/a 184 -
Other
forecasted
transactions - - -
-------------------------------------------------------------------------
Derivative
related
amounts $ 13,036 $ 281
-------------------------------------------------------------------------
(1) Interest rate swaps outstanding at January 31, 2010 mature between
March and June 2010.
(2) Equity contracts and equity-linked deposits outstanding at
January 31, 2010 mature between March 2010 and March 2011.
(3) Foreign exchange contracts outstanding at January 31, 2010 mature
between February and June 2010.
n/a - not applicable.
There were no forecasted transactions that failed to occur during the
quarter ended January 31, 2010.
8. Subordinated Debentures
On November 20, 2009, conventional subordinated debentures in the
amount of $60,000 were redeemed by the Bank at face value.
9. Capital Stock
Share Capital
For the three months ended
---------------------------------------------------
January 31, 2010 January 31, 2009
---------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------------------------------------------------------------------
Preferred Shares
- Series 3
Outstanding at
beginning of
period 8,390,000 $ 209,750 - $ -
Issued during
the period - - - -
Outstanding at
end of
period(1) 8,390,000 209,750 - -
---------------------------------------------------------------------
Common Shares
Outstanding at
beginning of
period 63,903,460 226,480 63,457,142 221,914
Issued under
dividend
reinvestment
plan(2) 36,146 758 - -
Issued on
exercise or
exchange of
options 34,143 304 10,990 60
Transferred from
contributed
surplus on
exercise or
exchange of
options - 130 - 36
Issued on
exercise of
warrants 3,200 44 - -
---------------------------------------------------------------------
Outstanding at
end of
period(3) 63,976,949 227,716 63,468,132 222,010
---------------------------------------------------------------------
Share Capital $ 437,466 $ 222,010
---------------------------------------------------------------------
(1) Holders of the Preferred Shares - Series 3 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. For further information
on dividend rates after April 30, 2014, refer to Note 18 of the
audited consolidated financial statements for the year ended
October 31, 2009 (see page 85 of the 2009 Annual Report).
(2) During the quarter, shares were issued at a 2% discount from the
average closing price of the five trading days preceding the
dividend payment date.
(3) On February 1, 2010, 2,065,088 common shares were issued as part
of the acquisition of National Leasing Group (Note 16).
Warrants to Purchase Common Shares
For the three months ended
-----------------------------
January 31 January 31
Number of Warrants 2010 2009
---------------------------------------------------------------------
Outstanding at beginning of period 14,964,356 -
Issued - -
Purchased and cancelled (4,500) -
Exercised (3,200) -
---------------------------------------------------------------------
Outstanding at end of period 14,956,656 -
---------------------------------------------------------------------
Normal Course Issuer Bid
On January 18, 2010, the Bank received approval from the Toronto
Stock Exchange to institute a Normal Course Issuer Bid (NCIB) to
purchase and cancel up to 748,058 of its warrants. The NCIB commenced
January 20, 2010 and will expire January 19, 2011. From January 20 to
January 31, 2010, the Bank purchased and cancelled 4,500 warrants at
an aggregate cost of $33 which was charged to retained earnings.
10. Stock-Based Compensation
Stock Options
For the three months ended
---------------------------------------------------
January 31, 2010 January 31, 2009
---------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------------------------------------------------------------
Options
Balance at
beginning of
period 4,394,605 $ 18.66 5,204,882 $ 20.83
Granted 358,291 22.09 990,035 11.76
Exercised or
exchanged (55,000) 13.83 (21,000) 10.07
Forfeited (29,665) 17.88 - -
---------------------------------------------------------------------
Balance at end
of period 4,667,731 $ 18.98 6,173,917 $ 19.41
---------------------------------------------------------------------
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 55,500
options (2009 - 21,000) exercised or exchanged in the three months
ended January 31, 2010, option holders exchanged the rights to 33,650
options (2009 - 15,000) and received 12,293 shares (2009 - 4,990) in
return under the cashless settlement alternative.
For the quarter ended January 31, 2010, salary expense of $1,206
(2009 - $1,561) was recognized relating to the estimated fair value
of options. 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 2.6% (2009 - 2.1%), (ii)
expected option life of 4.0 years (2009 - 4.0 years), (iii) expected
volatility of 44% (2009 - 35%), and (iv) expected dividends of 2.0%
(2009 - 4.0%). The weighted average fair value of options granted was
estimated at $7.16 (2009 - $1.90) per share.
Further details relating to stock options outstanding and exercisable
at January 31, 2010 follow:
Options Outstanding Options Exercisable
---------------------------------------------------
Weighted
Average
Remaining
Contract- Weighted Weighted
ual Average Average
Range of Exercise Number of Life Exercise Number of Exercise
Prices Options (years) Price Options Price
---------------------------------------------------------------------
$ 8.58 to $13.78 1,190,235 3.2 $ 12.08 216,500 $ 13.78
$15.46 to $17.58 1,157,200 2.0 16.61 712,000 16.44
$19.16 to $21.46 1,062,890 1.9 21.45 753,100 21.44
$22.09 to $26.38 1,034,126 3.3 24.41 284,700 24.96
$28.11 to $31.18 223,280 2.9 31.13 - -
---------------------------------------------------------------------
Total 4,667,731 2.6 $ 18.98 1,966,300 $ 19.30
---------------------------------------------------------------------
Restricted Share Units
Under the Restricted Share Unit (RSU) plan, certain employees are
eligible to receive an award in the form of RSUs. Each RSU entitles
the holder to receive the cash equivalent of the market value of the
Bank's common shares at the vesting date and an amount equivalent to
the dividends paid on the common shares during the vesting period.
RSUs vest on each anniversary of the grant in equal one-third
installments over a vesting period of three years. Salary expense is
recognized evenly over the vesting period, except where the employee
is eligible to retire prior to the vesting date, in which case the
expense is recognized between the grant date and the date the
employee is eligible to retire.
For the quarter ended January 31, 2010, salary expense of $375
($261 net of tax) was recognized related to RSUs (2009 - nil). As at
January 31, 2010, the liability for the RSUs held under this plan was
$4,360 (2009 - nil). At the end of each period, the liability and
salary expense are adjusted to reflect changes in the market value of
the Bank's common shares.
For the three months ended
-----------------------------
January 31 January 31
Number of RSUs 2010 2009
---------------------------------------------------------------------
Restricted Share Units
Balance at beginning of period 285,197 -
Granted 13,240 -
Vested - -
Forfeited (3,681) -
---------------------------------------------------------------------
Balance at end of period 294,756 -
---------------------------------------------------------------------
11. Contingent Liabilities and Commitments
Significant contingent liabilities and commitments, including
guarantees provided to third parties, are discussed in Note 20 of the
Bank's audited consolidated financial statements for the year ended
October 31, 2009 (see page 88 of the 2009 Annual Report) and include:
As at As at As at
January 31 October 31 January 31
2010 2009 2009
---------------------------------------------------------------------
Guarantees and standby
letters of credit
Balance outstanding $ 187,786 $ 196,380 $ 217,270
Business credit cards
Total approved limit 11,025 10,496 11,763
Balance outstanding 2,794 2,566 2,703
---------------------------------------------------------------------
In the ordinary course of business, the Bank and its subsidiaries are
party to legal proceedings. Based on current knowledge, management
does not expect the outcome of any of these proceedings to have a
material effect on the consolidated financial position or results of
operations.
12. Financial Instruments
As a financial institution, most of the Bank's balance sheet is
comprised of financial instruments and the majority of net income
results from gains, losses, income and expenses related to the same.
Financial instrument assets include cash resources, securities,
securities purchased under resale agreements, loans and derivative
financial instruments. Financial instrument liabilities include
deposits, securities sold under repurchase 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 2009 consolidated annual financial
statements.
The value of financial assets recorded on the consolidated balance
sheets at January 31, 2010 at fair value (cash, securities,
securities purchased under resale agreements and derivatives) was
determined using published market prices quoted in active markets for
97% (2009 - 98%) of the portfolio and estimated using a valuation
technique based on observable market data for 3% (2009 - 2%) of the
portfolio. The value of liabilities recorded on the consolidated
balance sheet at fair value (derivatives and securities sold under
repurchase agreements) was determined using a valuation technique
based on observable market data. There were no financial instruments
that were measured using unobservable 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 2009 consolidated annual financial
statements. The table does not include assets and liabilities that
are not considered financial instruments.
January 31, 2010 October 31, 2009
------------------------------------------------------------
Fair Fair
Value Value
Over Over
(Under) (Under)
Book Fair Book Book Fair Book
Value Value Value Value Value Value
-------------------------------------------------------------------------
Assets
Cash
resources $294,166 $294,166 $ - $297,104 $297,104 $ -
Securi-
ties 1,855,784 1,855,784 - 1,891,409 1,891,409 -
Securities
purchased
under
resale
agreements 20,000 20,000 - - - -
Loans(1) 9,364,019 9,407,326 43,307 9,320,749 9,368,074 47,325
Other
assets(2) 84,730 84,730 - 97,179 97,179 -
Derivative
related 802 802 - 2,334 2,334 -
Liabilities
Depo-
sits(1) 10,016,880 10,132,300 115,420 9,628,949 9,739,360 110,411
Other
liabili-
ties(3) 228,190 228,190 - 265,295 265,295 -
Securities
sold under
repurchase
agreements - - - 300,242 300,242 -
Subordinated
debentures 315,000 318,397 3,397 375,000 377,363 2,363
Derivative
related 64 64 - 74 74 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Loans and deposits exclude deferred premiums and deferred
revenue, which are not financial instruments.
(2) Other assets exclude land, buildings and equipment, goodwill and
other intangible assets, reinsurers' share of unpaid claims and
adjustment expenses, future income tax asset, prepaid and
deferred expenses, financing costs and other items that are not
financial instruments.
(3) Other liabilities exclude future income tax liability, deferred
revenue, unearned insurance premiums and other items that are not
financial instruments.
(4) For further information on interest rates associated with
financial assets and liabilities, including derivative
instruments, refer to Note 13.
13. Interest Rate Sensitivity
The Bank's exposure to interest rate risk as a result of a difference
or gap between the maturity or repricing behavior of interest
sensitive assets and liabilities, including derivative financial
instruments, is discussed in Note 28 of the audited consolidated
financial statements for the year ended October 31, 2009 (see page 93
of the 2009 Annual Report). The following table shows the gap
position for selected time intervals.
Asset Liability Gap Positions
Floating
Rate and Total
Within 1 to 3 3 Months Within
($ millions) 1 Month Months to 1 Year 1 Year
-------------------------------------------------------------------------
January 31, 2010
Assets
Cash resources and
securities $ 59 $ 44 $ 632 $ 735
Loans 4,724 593 899 6,216
Other assets - - - -
Derivative financial
instruments(1) - - 152 152
-------------------------------------------------------------------------
Total 4,783 637 1,683 7,103
-------------------------------------------------------------------------
Liabilities and Equity
Deposits 3,935 733 1,913 6,581
Other liabilities 3 6 26 35
Debentures - - 70 70
Shareholders' equity - - - -
Derivative financial
instruments(1) 152 - - 152
-------------------------------------------------------------------------
Total $ 4,090 $ 739 $ 2,009 $ 6,838
-------------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 693 $ (102) $ (326) $ 265
-------------------------------------------------------------------------
Cumulative Gap $ 693 $ 591 $ 265 $ 265
-------------------------------------------------------------------------
Cumulative Gap as a
percentage of total
assets 5.9% 5.0% 2.2% 2.2%
-------------------------------------------------------------------------
October 31, 2009
Cumulative gap $ 486 $ 275 $ 208 $ 208
-------------------------------------------------------------------------
Cumulative gap as a
Percentage of total
assets 4.1% 2.3% 1.8% 1.8%
-------------------------------------------------------------------------
January 31, 2009
Cumulative gap $ 1,295 $ 1,371 $ 432 $ 432
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 11.3% 12.0% 3.8% 3.8%
-------------------------------------------------------------------------
Non-
1 Year More than interest
($ millions) to 5 Years 5 Years Sensitive Total
-------------------------------------------------------------------------
January 31, 2010
Assets
Cash resources and
securities $ 1,264 $ 83 $ 68 $ 2,150
Loans 3,058 109 (81) 9,302
Other assets - - 190 190
Derivative financial
instruments(1) - - - 152
-------------------------------------------------------------------------
Total 4,322 192 177 11,794
-------------------------------------------------------------------------
Liabilities and Equity
Deposits 3,334 105 (16) 10,004
Other liabilities 35 8 224 302
Debentures 170 75 - 315
Shareholders' equity - - 1,021 1,021
Derivative financial
instruments(1) - - - 152
-------------------------------------------------------------------------
Total $ 3,539 $ 188 $ 1,229 $ 11,794
-------------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 783 $ 4 $ (1,052) $ -
-------------------------------------------------------------------------
Cumulative Gap $ 1,048 $ 1,052 $ - $ -
-------------------------------------------------------------------------
Cumulative Gap as a
percentage of total
assets 8.9% 8.9% -% -%
-------------------------------------------------------------------------
October 31, 2009
Cumulative gap $ 1,052 $ 1,073 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as a
Percentage of total
assets 8.9% 9.0% -% -%
-------------------------------------------------------------------------
January 31, 2009
Cumulative gap $ 805 $ 766 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 7.0% 6.7% -% -%
-------------------------------------------------------------------------
(1) Derivative financial instruments are included in this table at the
notional amount.
(2) Accrued interest is excluded in calculating interest sensitive assets
and liabilities.
(3) Potential prepayments of fixed rate loans and early redemption of
redeemable fixed term deposits have not been estimated. Redemptions
of fixed term deposits where depositors have this option are not
expected to be material. The majority of fixed rate loans, mortgages
and leases are either closed or carry prepayment penalties.
The effective, weighted average interest rates for each class of
financial assets and liabilities are shown below:
Floating
January Rate and 3 Months Total 1 Year More
31, Within 1 to 3 to 1 Within to than
2010 1 Month Months Year 1 Year 5 Years 5 Years Total
-------------------------------------------------------------------------
Total
assets 3.8% 2.8% 3.9 3.7% 5.0% 5.0% 4.2%
Total
liabil-
ities 0.7 1.9 2.9 1.4 3.4 5.7 2.2
-------------------------------------------------------------------------
Interest
rate
sensitive
gap 3.1% 0.9% 1.0% 2.3% 1.6% (0.7)% 2.0%
-------------------------------------------------------------------------
October 31,
2009
-------------------------------------------------------------------------
Total
assets 3.8% 2.6% 4.5% 3.8% 4.9% 5.8% 4.3%
Total
liabil-
ities 0.7 2.4 3.1 1.4 3.6 5.8 2.3
-------------------------------------------------------------------------
Interest
rate
sensitive
gap 3.1% 0.2% 1.4% 2.4% 1.3% -% 2.0%
-------------------------------------------------------------------------
January 31,
2009
-------------------------------------------------------------------------
Total
assets 3.9% 3.1% 5.0% 4.0% 5.4% 6.4% 4.5%
Total
liabil-
ities 1.3 2.5 3.9 2.3 4.2 5.8 2.9
-------------------------------------------------------------------------
Interest
rate
sensitive
gap 2.6% 0.6% 1.1% 1.7% 1.2% 0.6% 1.6%
-------------------------------------------------------------------------
Based on the current interest rate gap position, it is estimated that
a one-percentage point increase in all interest rates would decrease
net interest income by approximately 0.8% or $2,066 (October 31, 2009
- 2.5 % or $6,574) and decrease other comprehensive income $16,052
(October 31, 2009 - $21,355) net of tax, respectively over the
following twelve months. A one-percentage point decrease in all
interest rates would increase net interest income by approximately
3.2% or $8,532 (October 31, 2009 - 3.8% or $10,241) and increase
other comprehensive income $16,052 (October 31, 2009 - $21,355) net
of tax.
14. Segmented Information
The Bank operates principally in two industry segments - banking and
trust, and insurance. These two segments differ in products and
services but are both within the same geographic region. The banking
and trust segment provides banking, trust and wealth management
services to personal clients, small to medium-sized commercial
business clients and institutional clients primarily in Western
Canada. The insurance segment provides home and auto insurance to
individuals in British Columbia and Alberta.
Banking and Trust Insurance
-----------------------------------------------------------
Three months ended Three months ended
-----------------------------------------------------------
January October January January October January
31 2010 31 2009 31 2009 31 2010 31 2009 31 2009
-------------------------------------------------------------------------
Net interest
income
(teb)(1) $ 72,619 $ 66,387 $ 53,101 $ 1,687 $ 1,625 $ 1,495
Less teb
adjustment 2,379 2,219 1,438 184 178 148
-------------------------------------------------------------------------
Net interest
income per
financial
statements 70,240 64,168 51,663 1,503 1,447 1,347
Other
income(2) 20,616 17,019 20,218 5,750 5,068 2,133
-------------------------------------------------------------------------
Total
revenues 90,856 81,187 71,881 7,253 6,515 3,480
Provision
for credit
losses 3,713 3,393 3,369 - - -
Non-interest
expenses 37,627 38,997 33,910 2,621 2,576 2,495
Provision for
income taxes 12,750 11,271 9,713 1,287 1,049 188
Non-controlling
interest in
subsidiary 76 59 67 - - -
-------------------------------------------------------------------------
Net income $ 36,690 $ 27,467 $ 24,822 $ 3,345 $ 2,890 $ 797
-------------------------------------------------------------------------
Total
average
assets
($ millions)
(3) $ 11,317 $ 11,342 $ 10,711 $ 214 $ 212 $ 188
-------------------------------------------------------------------------
Total
-----------------------------
Three months ended
-----------------------------
January October January
31 2010 31 2009 31 2009
-------------------------------------------------------------------------
Net interest income (teb)(1) $ 74,306 $ 68,012 $ 54,596
Less teb adjustment 2,563 2,397 1,586
-------------------------------------------------------------------------
Net interest income per
financial statements 71,743 65,615 53,010
Other income 26,366 22,087 22,351
-------------------------------------------------------------------------
Total revenues 98,109 87,702 75,361
Provision for credit losses 3,713 3,393 3,369
Non-interest expenses 40,248 41,573 36,405
Provision for income taxes 14,037 12,320 9,901
Non-controlling interest in subsidiary 76 59 67
-------------------------------------------------------------------------
Net income $ 40,035 $ 30,357 $ 25,619
-------------------------------------------------------------------------
Total average assets ($ millions)(3) $ 11,531 $ 11,554 $ 10,899
-------------------------------------------------------------------------
(1) Taxable Equivalent Basis (teb) - Most financial institutions analyze
revenue on a taxable equivalent basis to permit uniform measurement
and comparison of net interest income. Net interest income (as
presented in the consolidated statement of income) includes tax-
exempt income on certain securities. Since this income is not
taxable, the rate of interest or dividends received is significantly
lower than would apply to a loan or security of the same amount. The
adjustment to taxable equivalent basis increases interest income and
the provision for income taxes to what they would have been had the
tax-exempt securities been taxed at the statutory rate. The taxable
equivalent basis does not have a standardized meaning prescribed by
generally accepted accounting principles and therefore may not be
comparable to similar measures presented by other financial
institutions.
(2) Other income for the insurance segment is presented net of net
claims, adjustment expenses and policy acquisition expenses and
includes gains on sale of securities.
(3) Assets are disclosed on an average daily balance basis as this
measure is most relevant to a financial institution and is the
measure reviewed by management.
15. Capital Management
Capital for Canadian financial institutions is managed and reported
in accordance with a capital management framework specified by OSFI
commonly called Basel II.
Capital funds are managed in accordance with policies and plans that
are regularly reviewed and approved by the Board of Directors and
take into account forecasted capital needs and markets. The goal is
to maintain adequate regulatory capital to be considered well
capitalized, protect customer deposits and provide capacity for
internally generated growth and strategic opportunities that do not
otherwise require accessing the public capital markets, all while
providing a satisfactory return for shareholders.
Additional information about the Bank's capital management practices
is provided in Note 31 to the 2009 audited financial statements
beginning on page 97 of the 2009 Annual Report.
Capital Structure and Regulatory Ratios
As at As at As at
January 31 October 31 January 31
2010 2009 2009
---------------------------------------------------------------------
Capital
Tier 1 $ 1,094,841 $ 1,063,287 $ 787,859
Total 1,420,842 1,449,790 1,180,204
---------------------------------------------------------------------
Capital ratios
Tier 1 11.6% 11.3% 8.7%
Total 15.1 15.4 13.0
Assets to capital multiple 8.2x 8.1x 9.3x
---------------------------------------------------------------------
During the quarter ended January 31, 2010, the Bank complied with all
internal and external capital requirements.
16. Subsequent Event
On February 1, 2010, the Bank acquired 100% of the outstanding common
shares of privately held National Leasing Group Inc. (National
Leasing) in exchange for $52.8 million in cash, 2,065,088 common
shares of the Bank and contingent consideration for a total agreed
upon value of $130.0 million. Both the Bank and the vendors have the
option to trigger the payment of the contingent consideration no
earlier than November 1, 2012. Any required adjustment to the
contingent consideration will be recognized as an adjustment to
goodwill in the period in which the contingency is resolved.
National Leasing is a commercial equipment leasing company for small
to mid-size transactions, headquartered in Winnipeg, Manitoba.
National Leasing has over 58,000 existing lease agreements with a
collective book value of approximately $650 million, including
securitized leases which comprise approximately one half of the
portfolio and are off-balance sheet.
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.
During 2008, the Bank commenced 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 and the design and planning phases are complete, and the
solution development phase is expected to be completed by the end of
fiscal 2010.
The impact of the transition to IFRS on the Bank's consolidated
financial statements for current standards is not yet determinable.
CWB continues to monitor the International Accounting Standards
Board's proposed changes to standards during Canada's transition to
IFRS. These proposed changes may have a significant impact on the
Bank's implementation plan and future financial statements.
-------------------------------------------------------------------------
Shareholder Information
-------------------------------------------------------------------------
Head Office Transfer Agent and Registrar
Canadian Western Bank & Trust Valiant Trust Company
Suite 3000, Canadian Western Suite 310, 606 - 4th Street S.W.
Bank Place Calgary, AB T2P 1T1
10303 Jasper Avenue Telephone: (403) 233-2801
Edmonton, AB T5J 3X6 Fax: (403) 233-2857
Telephone: (780) 423-8888 Website: www.valianttrust.com
Fax: (780) 423-8897 E-mail: [email protected]
Website: www.cwbankgroup.com
Eligible Dividends Designation
Subsidiary Offices
CWB designates all dividends for both
Canadian Western Trust Company common and preferred shares paid to
Suite 600, 750 Cambie Street Canadian residents as "eligible
Vancouver, BC V6B 0A2 dividends", as defined in the Income
Toll-free: 1-800-663-1124 Tax Act (Canada), unless otherwise
Fax: (604) 669-6069 noted.
Website: www.cwt.ca
Dividend Reinvestment Plan
Canadian Direct Insurance
Incorporated CWB's dividend reinvestment plan allows
Suite 600, 750 Cambie Street common and preferred shareholders to
Vancouver, BC V6B 0A2 purchase additional common shares by
Telephone: (604) 699-3678 reinvesting their cash dividend without
Fax: (604) 699-3851 incurring brokerage and commission
Website: www.canadiandirect.com fees. For information about
participation in the plan, please
Valiant Trust Company contact the Transfer Agent and
Suite 310, 606 - 4th Street S.W. Registrar or visit www.cwbankgroup.com.
Calgary, AB T2P 1T1
Toll-free: 1-866-313-1872 Investor Relations
Fax: (403) 233-2857 For further financial information
Website: www.valianttrust.com contact:
Kirby Hill, CFA
Adroit Investment Management Ltd. Assistant Vice President, Investor and
Suite 1250, Canadian Western Public Relations
Bank Place Canadian Western Bank
10303 Jasper Avenue Telephone: (780) 441-3770
Edmonton, AB T5J 3N6 Toll-free: 1-800-836-1886
Telephone: (780) 429-3500 Fax: (780) 969-8326
Fax: (780) 429-9680 E-mail: [email protected]
Website:
www.adroitinvestments.ca Online Investor Information
National Leasing Group Inc. Additional investor information
1525 Buffalo Place including supplemental financial
Winnipeg, MB T3T 1L9 information and corporate presentations
Toll-free: 1-888-599-1966 are available on CWB's website at
Toll-free fax: 1-866-408-0729 www.cwbankgroup.com.
Website: www.nationalleasing.com
Quarterly Conference Call and Webcast
Stock Exchange Listings
The Toronto Stock Exchange CWB's quarterly conference call and
Common Shares: CWB live audio webcast will take place on
Series 3 Preferred Shares: March 4, 2010 at 2:00 p.m. ET.
CWB.PR.A The webcast will be archived on the
Common Share Purchase Bank's website at www.cwbankgroup.com
Warrants: CWB.WT for sixty days. A replay of the
conference call will be available until
March 18, 2010 by dialing (416) 849-
0833 or toll-free (800) 642-1687 and
entering passcode 56178290.
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: [email protected]
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