Very strong loan growth of 4% in the quarter and 15% over the past twelve months
Quarterly dividend declared of $0.15 per CWB common share
Quarterly dividend declared on CWB preferred shares
First Quarter 2012 Highlights(1) (compared to the same period in the prior year)
- Record total revenues, on a taxable equivalent basis (teb)(2), of $126.3 million, up 4% ($4.9 million).
- Very strong loan growth of 4% in the quarter and 15% over the past twelve months.
- Net income available to common shareholders of $41.5 million, up 10% ($3.6 million).
- Diluted earnings per common share of $0.54, up 8%.
- Adjusted cash earnings per common share(2) of $0.57, up 4%.
- Solid regulatory capital position supported by a tangible common equity to risk-weighted assets ratio(2) of 8.2%, Tier 1 capital ratio of 10.2% and total capital ratio of 14.6%.
- Total assets surpassed the $15 billion milestone.
- On March 7, declared a quarterly dividend of $0.15 per CWB common share, unchanged from the prior quarter and up 15% over the quarterly dividend declared a year earlier.
|(1)|| Effective this quarter, CWB's unaudited interim consolidated financial statements, including comparative information, and the accompanying Management's Discussion and Analysis (MD&A) are prepared in accordance with International Financial Reporting Standards (IFRS).
|(2)||Non-GAAP measure - refer to definitions following the table of Selected Financial Highlights on page 3.|
EDMONTON, March 7, 2012 /CNW/ - Canadian Western Bank (TSX: CWB) (CWB or the Bank) today announced strong financial performance marking the Bank's 95th consecutive profitable quarter. Net income available to common shareholders of $41.5 million increased 10% compared to the same quarter last year, while adjusted cash earnings per common share of $0.57 was up 4%. Record total revenues (teb) of $126.3 million represented a 4% increase over the same quarter last year as the positive impact of very strong loan growth was partially offset by a 30 basis point reduction in net interest margin (teb) and 7% lower other income.
Compared to the previous quarter, net income available to common shareholders increased 15%, while adjusted cash earnings per common share was up 8%. Total revenues (teb) grew 6% as positive contributions from significantly higher other income and 4% quarterly loan growth offset the impact of a 10 basis point reduction in net interest margin (teb).
| "CWB Group's strong first quarter performance is a great way to start the year," said Larry Pollock, President and CEO. "Quarterly loan growth exceeded our expectations and was supported by strong contributions from all of our businesses. We are well positioned in relation to all of our 2012 performance targets despite considerable pressure over the past two quarters on net interest margin. Looking forward, while we expect there will be ongoing challenges related to very low interest rates and increased competition, we believe recent downward pressure on net interest margin will moderate as we prudently reduce liquidity and replace maturing term deposits at comparatively lower rates. The anticipated redemption of $125 million of subordinated debentures in March 2012 will also help offset recent margin compression."
"Overall credit quality continues to improve and very strong first quarter loan growth will benefit earnings and revenues for the remainder of the year. Business activity across all areas of our geographic footprint supports our optimism about Western Canada's economic outlook, particularly over the longer term, but we also remain cautious about potential impacts in our markets from global economic uncertainties, including ongoing turmoil in Europe."
The quarterly return on common shareholders' equity of 15.5% was down 40 basis points compared to a year earlier as the benefit of increased net income was partially offset by comparatively higher percentage growth in the balance of common shareholders' equity. Equity growth compared to a year earlier mainly resulted from the retention of earnings and the issuance of common shares upon the exercise of warrants, partially offset by the redemption of warrants completed in August 2011. Compared to the previous quarter, return on common shareholders' equity increased 190 basis points mainly reflecting increased earnings. Quarterly return on assets of 1.07% was down from 1.15% last year, but up from 0.97% in the previous quarter.
Overall credit quality remained satisfactory and continued to show improvement from prior quarters. Gross impaired loans totaled $90.9 million at quarter end, compared to $97.3 million last quarter and $132.9 million a year earlier. This represented the seventh consecutive quarter of reductions in the dollar level of gross impaired loans from the peak level reached in the second quarter of 2010.
The Bank's strong first quarter performance represents an excellent start for fiscal 2012. We believe Canada will see modest growth this year despite the ongoing impact of global economic uncertainties, including the European debt crisis. Although it is still early in the year, we are also optimistic about the Bank's ability to meet or surpass all of our 2012 minimum performance targets. Strong loan growth was apparent across all lending sectors in the first quarter reflecting ongoing economic activity in each of our key western Canadian markets. While challenges related to the very low interest rate environment and increased competition will persist, we believe recent downward pressure on net interest margin will moderate going forward. Strong performance is expected from each company of the CWB Group and the ongoing growth of these businesses should continue to augment earnings and further diversify operations. While we are cautious and will continue to monitor economic factors and other developments closely, the current overall outlook for 2012 and beyond is positive. We look forward to reporting our second quarter results on June 7, 2012.
| Fiscal 2012 First Quarter Results Conference Call
CWB's first quarter results conference call is scheduled for Thursday, March 8, 2012 at 3:00 p.m. ET (1:00 p.m. MT). The Bank's executives will comment on financial results and respond to questions from analysts and institutional investors.
The conference call may be accessed on a listen-only basis by dialing 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.
A replay of the conference call will be available until March 22, 2012 by dialing 416-849-0833 (Toronto) or 1-855-859-2056 (toll-free) and entering passcode 51521762.
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 publicly traded Canadian bank headquartered in Western Canada. The Bank, along with its operating affiliates, National Leasing Group Inc., Canadian Western Trust Company, Valiant Trust Company, Canadian Direct Insurance Incorporated, Adroit Investment Management Ltd. and Canadian Western Financial Ltd., collectively offer a diversified range of financial services across Canada and are together known as the Canadian Western Bank Group. The common shares of Canadian Western Bank are listed on the Toronto Stock Exchange under the trading symbol "CWB". The Bank's Series 3 Preferred Shares trade on the Toronto Stock Exchange under the trading symbol "CWB.PR.A". Refer to www.cwbankgroup.com for additional information.
Selected Financial Highlights
|For the three months ended||Change from|
||January 31||January 31|
|($ thousands, except per share amounts)||2012||2011||2011||2011|
|Results of Operations|
|Net interest income (teb - see below)||$||107,509||$||106,184||$||101,218||6||%|
|Less teb adjustment||2,620||3,133||2,744||(5)|
|Net interest income per financial statements||104,889||103,051||98,473||7|
|Total revenues (teb)||126,300||119,673||121,363||4|
|Net income available to common shareholders||41,478||35,921||37,852||10|
|Earnings per common share|
|Adjusted cash (3)||0.57||0.53||0.55||4|
|Return on common shareholders' equity (4)||15.5||%||13.6||%||15.9||%||(40)||bp(5)|
|Return on assets (6)||1.07||0.97||1.15||(8)|
|Efficiency ratio (teb) (7)||43.7||45.5||44.5||(80)|
|Net interest margin (teb) (8)||2.77||2.87||3.07||(30)|
|Net interest margin||2.70||2.79||2.99||(29)|
|Provision for credit losses as a percentage of average loans||0.20||0.17||0.23||(3)|
|Insurance net earned premium||$||30,454||$||30,252||$||28,996||5|
|Claims loss ratio (9)||67||%||64||%||66||%||100||bp|
|Combined ratio (10)||96||93||95||100|
|Per Common Share|
|Closing market value||26.47||28.50||29.64||(11)|
|Common shares outstanding (thousands)||75,694||75,462||69,703||9|
| Balance Sheet and Off-Balance
|Assets under administration||6,912,244||9,369,589||9,013,307||(23)|
|Assets under management||843,648||816,219||804,486||5|
|Capital Adequacy (11)|
| Tangible common equity
to risk-weighted assets (12)
|Tier 1 ratio||10.2||11.1||11.6||(140)|
|(1)||Basic earnings per common share is calculated as net income available to common shareholders divided by the average number of common shares outstanding.|
|(2)||Diluted earnings per common share is calculated as net income available to common shareholders divided by the average number of common shares outstanding adjusted for the dilutive effects of stock options and warrants.|
|(3)||Adjusted cash earnings per common share is diluted earnings per common share excluding the after-tax amortization of acquisition-related intangible assets and the non-tax deductible change in fair value of contingent consideration. These exclusions represent non-cash charges mainly related to the acquisition of National Leasing Group Inc. and are not considered to be indicative of ongoing business performance. The Bank believes the adjusted results provide the reader with a better understanding about how management views CWB's performance.|
|(4)||Return on common shareholders' equity is calculated as annualized net income available to common shareholders divided by average common shareholders' equity.|
|(5)||bp - basis point change.|
|(6)||Return on assets is calculated as annualized net income available to common shareholders divided by average total assets.|
|(7)||Efficiency ratio is calculated as non-interest expenses divided by total revenues excluding the non-tax deductible change in fair value of contingent consideration.|
|(8)||Net interest margin is calculated as annualized net interest income divided by average total assets.|
|(9)||Claims loss ratio is net insurance claims and adjustment expenses as a percentage of net earned premiums.|
|(10)||Combined ratio is the sum of the claims loss ratio and the expense ratio. The expense ratio is defined as policy acquisition costs and non-interest expenses, net of commissions and processing fees, as a percentage of net earned premiums.|
|(11)||Capital adequacy is calculated in accordance with Basel II guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI). The 2011 ratios reflect the returns filed and have not been restated to IFRS.|
|(12)||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. The 2011 ratios reflect the returns filed and have not been restated to IFRS.|
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 IFRS 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.
Taxable equivalent basis, adjusted cash earnings per common share, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, provision for credit losses as a percentage of average loans, claims loss ratio, combined ratio and tangible common equity to risk-weighted assets do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other financial institutions.
Management's Discussion and Analysis
This management's discussion and analysis (MD&A) should be read in conjunction with Canadian Western Bank's (CWB or the Bank) unaudited interim consolidated financial statements for the period ended January 31, 2012 and the audited consolidated financial statements and MD&A for the year ended October 31, 2011, available on SEDAR at www.sedar.com and the Bank's website at www.cwbankgroup.com. CWB's financial results for the quarter ending January 31, 2012 represent the first quarterly financial statements prepared under International Financial Reporting Standards (IFRS). Except where indicated below, the factors discussed and referred to in the MD&A for fiscal 2011 remain substantially unchanged.
Commencing this quarter, the operating results are presented as one segment - Banking and Financial Services - operating in one geographic region - Canada.
CWB recorded its 95th consecutive profitable quarter highlighted by record total revenues and very strong loan growth of 4% in the quarter and 15% over the past twelve months. Net income available to common shareholders of $41.5 million increased 10% ($3.6 million) compared to the same quarter last year while diluted earnings per common share was up 8% to $0.54. Adjusted cash earnings per common share, which excludes the after-tax amortization of acquisition-related intangible assets and the non-tax deductible change in fair value of contingent consideration, was $0.57, up 4%. Lower percentage growth in diluted earnings per common share compared to net income mainly reflects the dilutive impact of 8.1 million CWB common shares issued between December 2010 and August 2011 upon the exercise of warrants.
Compared to the previous quarter, net income available to common shareholders was up 15% ($5.6 million) as the positive contribution from loan growth and higher other income largely attributed to a $5.0 million positive change in net gains on securities more than offset the impact of a 10 basis point reduction in net interest margin. Quarterly diluted earnings per common share increased 15% ($0.07) while adjusted cash earnings per common share was up 8% ($0.04).
The quarterly return on common shareholders' equity of 15.5% decreased 40 basis points from the same quarter last year as a material increase in common shareholders' equity more than offset the positive influence of higher net income. The retention of profits to support ongoing growth and the issuance of CWB common shares upon the exercise of warrants were the main factors contributing to the increase in common shareholders' equity, partially offset by the impact of warrants purchased for cancellation. Compared to the previous quarter, return on common shareholders' equity increased 190 basis points reflecting strong earnings growth and the impact of the warrant redemption completed in August 2011. First quarter return on assets of 1.07% was down eight basis points from a year earlier, but up 10 basis points compared to the previous quarter.
Total Revenues (teb)
Total revenues, comprising both net interest income and other income, reached a record $126.3 million for the quarter, up 4% ($4.9 million) compared to a year earlier. Growth in net interest income from very strong loan growth was constrained by a 30 basis point reduction in net interest margin, while other income was down 7% ($1.4 million) reflecting $2.3 million lower net gains on securities. Compared to the previous quarter, total revenues were up 6% ($6.6 million) mainly driven by a $5.0 million positive change in net gains on securities and very strong quarterly loan growth, partially offset by a 10 basis point reduction in net interest margin.
Net Interest Income (teb)
Quarterly net interest income of $107.5 million grew 6% ($6.3 million) over the same quarter last year reflecting the combined influence of very strong 15% loan growth, largely offset by the impact of a 30 basis point reduction in net interest margin to 2.77%. The deterioration in net interest margin compared to the same quarter in 2011 was mainly attributed to lower yields on loans and securities, partially offset by more favourable fixed term deposit costs. Lower asset yields reflect the combined impact of the very low interest rate environment, a flat interest rate curve as well as ongoing competitive pressures. Net interest margin was further impacted by higher average liquidity maintained in response to elevated global uncertainties, as well as anticipated requirements for near-term maturities of certain fixed term deposits and the redemption of subordinated debentures in March 2012.
Compared to the previous quarter, net interest income increased 1% ($1.3 million) as the positive impact of very strong 4% loan growth was largely offset by a 10 basis point reduction in net interest margin. Margin compression compared to the prior quarter mainly resulted from higher liquidity and a lower average yield on securities. Based on management's current view, including consideration of the Bank's current composition of assets and liabilities and expectations for reduced liquidity requirements moving forward, recent downward pressure on net interest margin is expected to moderate, helping to offset the impact of ongoing competitive pressures. Future increases in interest rates or a notable steepening of the interest rate curve would positively impact net interest margin.
Note 13 to the unaudited interim consolidated financial statements summarizes the Bank's exposure to interest rate risk as at January 31, 2012. 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 that would result over the following twelve months from a one-percentage point change in interest rates. The January 31, 2012 estimates are based on a number of assumptions and factors, which include:
- a constant structure in the interest sensitive asset and liability portfolios;
- floor levels for various deposit liabilities;
- interest rate changes affecting interest sensitive assets and liabilities by proportionally the same amount and applied at the appropriate repricing dates; and
- no early redemptions.
|January 31 2012||October 31 2011||January 31 2011|
|Estimated impact on net interest income of a 1% increase in interest rates|
|1 year percentage change||3.7||%||3.0||%||2.7||%|
|Estimated impact on net interest income of a 1% decrease in interest rates|
|1 year percentage change||(4.5)||%||(3.7)||%||(3.7)||%|
It is estimated that a one-percentage point increase in all interest rates at January 31, 2012 would decrease unrealized gains related to available-for-sale securities and result in a reduction in other comprehensive income of approximately $10.1 million, net of tax (January 31, 2011 - $8.2 million); it is estimated that a one-percentage point decrease in all interest rates at January 31, 2012 would result in a higher level of unrealized gains related to available-for-sale securities and increase other comprehensive income by similar amounts.
Management will continue to manage the asset liability structure and interest rate sensitivity within the Bank's established policies through pricing and product initiatives, as well as the use of interest rate swaps and other appropriate strategies.
First quarter other income of $18.8 million was down 7% ($1.4 million) from a year earlier as growth in credit related fee income ($0.4 million), trust and wealth management fees and the positive impact of $1.3 million lower contingent consideration fair value change was more than offset by $2.3 million lower net gains on securities and a $0.6 million reduction in the 'other' component of other income. The level of gains on securities in the first quarter last year was mainly realized due to a reduction in the Bank's investments in preferred shares of other financial institutions. The decision to reposition a portion of these preferred shares reflects forthcoming changes under the new regulatory capital framework known as Basel III that requires a deduction from regulatory capital or an increase in risk weightings for amounts over a certain threshold for investments in other financial institutions. Based on the current composition of the securities portfolio and elevated volatility in financial markets resulting from ongoing global uncertainties, CWB expects the future level of quarterly net gains on securities will be similar to or below that achieved in the current quarter. The reduction in the 'other' category of other income compared to the same period last year resulted from a combination of lower revenue contributions resulting from the termination of a lease servicing contract during the current quarter, partially offset by contributions from the finalization of loan realization assets and a positive change in fair value of certain interest rate swaps recognized in the first quarter last year. Quarterly net insurance revenues, retail services and foreign exchange gains each showed modest decreases compared to the same period a year earlier.
Other income was up $5.3 million compared to the previous quarter mainly reflecting a $5.0 million positive change in net gains on securities. Net gains on securities of $1.9 million in the first quarter compared to net losses of $3.1 million in the previous period. The first quarter contingent consideration fair value change of $1.2 million compares to $3.5 million in the previous period. The net benefit to other income of a $2.3 million lower charge for contingent consideration was largely offset by a $2.1 million reduction in the 'other' category of other income, which in the fourth quarter of 2011 included $1.9 million from the sale of a residential mortgage portfolio. Net insurance revenues were down $0.5 million as the benefit of growth in net earned premiums was offset by increased claims expense in the home insurance line of business, largely attributed to windstorms in southern Alberta.
Overall credit quality remained satisfactory and within expectations in view of favourable economic activity and a relatively positive outlook in Western Canada despite ongoing global uncertainties. The dollar level of gross impaired loans decreased for the seventh consecutive quarter. Compared to both the previous quarter and a year earlier, the total number of accounts classified as impaired was also down.
|For the three months ended|| Change from
|(unaudited)|| January 31
| October 31
|January 31 2011|
|Gross impaired loans, beginning of period||$||97,258||$||108,117||$||143,700||(32)||%|
|Reductions, impaired accounts paid down or returned to performing status||(20,787)||(18,455)||(33,240)||63|
|Balance of the ten largest impaired accounts||$||44,252||$||46,884||$||63,909||(44)||%|
|Total number of accounts classified as impaired(3)||139||153||195||(40)|
|Gross impaired loans as a percentage of total loans(3)||0.71||%||0.79||%||1.20||%||(49)||bp(2)|
|(1)|| Gross impaired loans includes foreclosed assets held for sale with a carrying value of $4,683 (October 31, 2011 - $3,241 and January 31, 2011 - $1,591).
|(2)|| bp - basis point change.
|(3)||Total loans do not include an allocation for credit losses or deferred revenue and premiums.|
Gross impaired loans at January 31, 2012 were $90.9 million, compared to $97.3 million last quarter and $132.9 million a year earlier. The ten largest accounts classified as impaired, measured by dollars outstanding, represented approximately 49% of total gross impaired loans, relatively consistent with prior periods. New formations of impaired loans totaled $18.9 million, compared to $14.1 million last quarter and $32.9 million a year earlier.
The dollar level of gross impaired loans represented 0.71% of total loans at quarter end, compared to 0.79% last quarter and 1.20% one year ago. While the trends are positive, management expects the dollar level of gross impaired loans will fluctuate from the current level until global uncertainties subside and overall economic conditions strengthen further. The dollar level of gross impaired loans goes up and down 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. Actual credit losses are expected to remain within the Bank's historical range of acceptable levels.
The first quarter provision for credit losses measured against average loans of 20 basis points was at the low end of the Bank's 2012 target range of 20 to 25 basis points. This result reflects ongoing positive credit trends in the equipment leasing portfolio and consistent expectations for credit quality in other areas. Based on the current environment and outlook, management believes the annual provision for credit losses will remain within the 2012 target range.
The total allowance for credit losses (collective and specific) represented 82% of gross impaired loans at quarter end, compared to 74% last quarter and 58% one year ago. The total allowance for credit losses was $74.6 million at January 31, 2012, compared to $72.0 million last quarter and $77.6 million a year earlier. The reduction in the total allowance for credit losses compared to the same period last year was entirely attributed to lower specific allowances. The collective allowance at January 31, 2012 was $62.7 million, compared to $61.3 million last quarter and $62.2 million a year earlier. The collective allowance as a percentage of risk-weighted loans was 57 basis points, unchanged from last quarter and down from 66 basis points one year ago. The decline in the collective allowance as a percentage of risk-weighted loans resulted from very strong loan growth. An enhanced methodology has been developed to estimate the collective allowance for credit losses. No material change on transition to IFRS was realized in the overall level of the collective allowance; however, the revised methodology has potential to increase volatility in the quarterly provision for credit losses.
One of management's key priorities is to maintain effective control of costs while ensuring the Bank is positioned to deliver strong growth over the long term. Effective execution of CWB's strategic plan will continue to require increased investment in certain areas. Significant anticipated expenditures relate to additional staff complement as well as expanded infrastructure and further technology upgrades. The majority of investment in these areas is aligned with the Bank's commitment to maximize shareholder value and is expected to provide material benefits in future periods. Ongoing compliance with an ever-increasing level of regulatory rules and oversight for all Canadian banks requires the investment of both time and resources, which further contributes to higher non-interest expenses. A new full-service branch is expected to open in Winnipeg, Manitoba in the fourth quarter of 2012. Other potential new branch locations are currently under consideration. Upgrades and expansion of existing branch infrastructure will also continue.
Compared to the same quarter last year, non-interest expenses of $55.7 million were up 1% ($0.5 million) as increases in salary and benefit costs, and premises and equipment expenses of $0.8 million and $0.6 million, respectively, were offset by a $0.8 million reduction in general expenses. The change in salary and benefit costs was driven by a combination of increased staff complement to support ongoing growth and annual salary increments, partially offset by lower expense related to restricted share units. The increase in premises and equipment expense includes the addition of a new full-service branch opened in Richmond, British Columbia (BC) in the latter part of 2011, as well as ongoing expansion and upgrades to existing infrastructure and technology. Within general expenses, capital and business taxes were down $1.0 million reflecting the final payment of BC capital taxes in the first quarter of 2011.
Compared to the previous quarter, non-interest expenses were down $0.4 million as lower general expenses were largely offset by $1.2 million higher salary and benefit costs related to increased staff complement and annual salary increments. Within general expenses, marketing and business development costs were down $1.2 million reflecting the timing of expenses related to ongoing initiatives to enhance awareness of the Bank's brand and product offerings. Reductions in professional fees and travel expenses of $0.5 million and $0.4 million, respectively, were largely offset by higher community investment and insurance costs.
The first quarter efficiency ratio (teb), which measures non-interest expenses as a percentage of total revenues (teb) excluding the non-tax deductible change in fair value of contingent consideration, was 43.7%, compared to 44.5% last year and 45.5% in the previous quarter. Given expected revenue growth and planned expenditures, management believes the 2012 target for the efficiency ratio of 46% or better will be achieved.
The first quarter income tax rate (teb) was 26.7%, down from 27.6% one year ago, while the tax rate before the teb adjustment was 23.6%, compared to 24.2% last year. The reduction mainly reflects the 150 basis point decrease in the basic federal income tax rate and the 50 basis point reduction in the provincial income tax rate in BC, both effective January 1, 2011.
Comprehensive income is comprised of net income and other comprehensive income (OCI), all net of income taxes, and totaled $52.9 million for the first quarter, compared to $38.5 million in the same period last year. The increase in comprehensive income was driven by a $10.8 million positive change in OCI related to favourable market value fluctuations in available-for-sale securities and 8% ($3.6 million) higher net income. While the combined dollar investment in preferred shares and common equities is relatively small in relation to total liquid assets, it increases the potential for comparatively larger fluctuations in OCI.
Total assets surpassed the $15 billion milestone, increasing 4% ($635 million) in the quarter and 18% ($2,385 million) in the past year to reach $15,484 million at January 31, 2012.
Cash and Securities
Cash, securities and securities purchased under resale agreements totaled $2,429 million at January 31, 2012, compared to $2,238 million last quarter and $1,754 million one year ago (refer to the Treasury Management section of this MD&A for additional details). Net unrealized gains recorded on the balance sheet at January 31, 2012 were $18.8 million, compared to $10.9 million at October 31, 2011 and $27.2 million a year earlier. The change in unrealized gains compared to the same time last year was mainly attributed to net gains realized through the statements of income and fluctuations in the market value of the Bank's investment in common equities and preferred shares. Compared to the prior quarter, the change in net unrealized gains mainly reflects increased market values within the preferred equities portfolio. The securities portfolio is primarily comprised of high quality debt instruments, preferred shares and common 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 interest rates, movements in market credit spreads and shifts in the interest rate curve. Volatility in equity markets also leads to fluctuations in value, particularly for common shares.
Net realized gains on securities in the first quarter of $1.9 million compares to $4.2 million in the same period last year. In the previous quarter, impairments recognized on certain equity investments resulted in a $3.1 million net loss on securities. The majority of gains on securities in the current quarter resulted from the repositioning of certain fixed income investments. Based on the current composition of the securities portfolio and elevated volatility in financial markets resulting from ongoing global uncertainties, CWB expects the future level of quarterly net gains on securities will be similar to or below that achieved in the current quarter. The Bank has no direct investment in any non-Canadian sovereign debt or other securities outside of Canada or the United States.
The Bank continues to refine its methodologies for measuring and monitoring liquidity risk. Use of dynamic scenario analysis has allowed for a reduction in liquid asset coverage while maintaining prudent liquidity standards. In view of elevated market risks mainly attributed to ongoing global economic uncertainties, including the European debt crisis, the composition of liquid assets will continue to include a higher balance of cash resources and low yielding government securities compared to what would be held in a more normal market environment. That being said, average liquidity is expected to trend lower compared to the levels maintained over the past two quarters. The strategy to maintain higher than normal liquidity has a negative impact on net interest margin but is considered appropriate in view of the current macro economic environment.
DBRS Limited maintains published credit ratings on the Bank's senior debt (deposits) and subordinated debentures of "A (low)" and "BBB (high)", respectively, both with a stable outlook. Credit ratings do not comment on market price or suitability of any financial instrument for a particular investor and are not recommendations to purchase, sell or hold securities. Ratings are subject to revision or withdrawal at any time by the rating organization. Management believes the ratings widen the base of clients and investors who can participate in CWB's deposit and debt offerings while also lowering the Bank's overall cost of capital.
The Bank for International Settlements (BIS) finalized liquidity proposals initially described in its document "International Framework for Liquidity Risk, Measurement, Standards and Monitoring." The proposals as outlined remain subject to significant transition and monitoring activities, and revisions are expected. The new liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) are presently subject to an observation period and include a review clause to address any unintended consequences. It is too early to tell how this framework will impact CWB. The BIS is currently expected to introduce the LCR effective January 1, 2015 and the NSFR effective January 1, 2018.
Total loans of $12,745 million grew 4% ($452 million) in the quarter and 15% ($1,709 million) in the past twelve months. The level of quarterly growth measured in both dollar and percentage terms was led by activity in general commercial lending, and equipment financing and leasing. Positive quarterly growth was also realized in both real estate lending, and personal loans and mortgages, while the amount of oil and gas production loans was relatively unchanged. Measured by geographic concentration, lending activity in Alberta showed the highest quarterly growth while performance in other areas was also strong. Over the past twelve months, strong double-digit growth is apparent across all lending sectors and each geographic market with the only exception being Manitoba, where loans are up by slightly less than 10%.
While there is increased competition in certain areas, management believes market share will be gained from the combined positive influences of an expanded market presence, increased brand awareness in core geographic markets due in part to targeted marketing initiatives, and the effective execution of CWB's strategic plan focused on further enhancing existing competitive advantages. Canada's domestic economy is expected to grow modestly in 2012 despite impacts from ongoing global economic uncertainties. The Bank's key markets in Western Canada are generally expected to perform well relative to the rest of Canada. While strong competition from domestic banks and other financial services firms is expected to persist, the current overall outlook for new loans is encouraging. Major risks that could have a material adverse impact on the Bank's expectations include a global economic recession spurred by the European debt crisis, a recession in the United States, or a meaningful slowdown in China's economic growth. Based on a cautiously optimistic outlook and stronger than expected first quarter loan growth, CWB is well positioned to meet or exceed its fiscal 2012 loan growth target of 10%.
Loans in the Bank's broker-sourced residential mortgage business, Optimum Mortgage (Optimum), increased 6% ($60 million) in the quarter and 18% ($154 million) over the past twelve months to reach $995 million. Results in the quarter reflected growth in both uninsured mortgages and higher ratio insured mortgages. Uninsured mortgages continue to be secured via conventional residential first mortgages carrying a weighted average loan-to-value ratio at initiation of approximately 70%, and represented approximately 61% of Optimum's total portfolio at quarter end. CWB remains committed to further developing this mortgage business as it continues to produce solid returns while maintaining an acceptable risk profile. The possible benefits of using securitization or whole loan sales as additional alternatives for cost-effective funding are also being evaluated. The level of new lending opportunities in this business could moderate going forward reflecting increased competitive pressure and overall slower growth in demand for residential mortgages in Canada.
Under IFRS, the Bank's securitized assets are reported on-balance sheet as part of total loans. The gross amount of securitized loans at January 31, 2012 totaled $150 million, compared to $91 million last quarter and $170 million one year ago.
Total deposits at quarter end were $12,961 million, up 5% ($566 million) from the previous quarter and 21% ($2,280 million) over the past year. Total branch deposits represented 57% of total deposits at January 31, 2012, compared to 58% in the previous quarter and 63% one year earlier. Demand and notice deposits were 32% of total deposits, unchanged from the previous quarter and down from 35% a year earlier. Other deposits are mainly comprised of retail term deposits raised through the Bank's deposit broker network and $650 million of fixed term deposits raised through debt capital markets.
Total branch deposits, including trust services deposits, of $7,379 million increased 2% ($168 million) in the quarter and 9% ($618 million) over the past twelve months. The demand and notice component within branch deposits, which includes lower cost deposits, was up 5% ($212 million) from last quarter and 14% ($508 million) compared to the same time last year to reach $4,203 million. Reflecting CWB's business banking focus, a material portion of total branch deposits are attributed to larger commercial balances that are subject to greater fluctuation compared to smaller personal deposits. A strategic focus on increasing branch-raised deposits will continue in 2012, with emphasis on the demand and notice component, which is often lower cost and provides associated transactional fee income. CWB's expanded market presence, which includes the opening of three new full-service branches since September 2010, also supports objectives to generate branch-raised deposits.
Management remains committed to further enhance and diversify all funding sources to support ongoing growth while maintaining acceptable net interest margins. The Bank's deposit broker network remains a valued source for raising insured fixed term retail deposits and has proven to be an extremely effective and efficient way to access funding and liquidity over a wide geographic base. Selectively utilizing the debt capital markets is also part of the Bank's strategy to further diversify the funding base over time. Provided costs remain satisfactory, management plans to continue utilizing securitization channels for a portion of its equipment leasing funding requirements in 2012.
Other Assets and Other Liabilities
Other assets at January 31, 2012 totaled $310 million, compared to $318 million last quarter and $309 million one year ago. Other liabilities at quarter end were $436 million, compared to $458 million the previous quarter and $413 million last year.
Off-balance sheet items include assets under administration and assets under management. Total assets under administration, which are comprised of trust assets under administration and third-party leases under service agreements totaled $6,912 million at January 31, 2012, compared to $9,370 million last quarter and $9,013 million one year ago. The significant reduction in assets under administration reflects a reduced level of leases under servicing agreements resulting from the termination of a lease servicing contract. Assets under management were $844 million at quarter end, compared to $816 million last quarter and $804 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). 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 12 and 21 of the audited consolidated financial statements on pages 97 and 106, respectively, in the Bank's 2011 Annual Report.
At January 31, 2012, CWB's Basel II total capital adequacy ratio, which measures regulatory capital as a percentage of risk-weighted assets, was 14.6%, compared to 15.4% last quarter and 16.5% one year ago. The Tier 1 ratio was 10.2% at January 31, 2012, down from 11.1% last quarter and 11.6% a year earlier. Current minimums for the total and Tier 1 capital adequacy ratios of Canadian banks as set by the Office of the Superintendent of Financial Institutions Canada (OSFI) are 10% and 7%, respectively.
Compared to one year ago, the Bank's Tier 1 regulatory capital increased with the retention of earnings, net of common and preferred share dividends, and the issuance of 5.4 million additional CWB common shares at $14 per share upon the exercise of warrants (refer to the audited consolidated financial statements and MD&A for the year ended October 31, 2011 for further details), partially offset by total costs for the purchase of warrants for cancellation. The decrease in Tier 1 capital from October 31, 2011 reflects the full transition impact of IFRS and the expiration of a Basel II transition provision that permitted the capital deduction related to CWB's insurance subsidiary ($83,500 at January 31, 2012; $80,942 at October 31, 2011) to be deducted from Tier 2 capital. Beginning in the first quarter of 2012, the deduction for the insurance subsidiary is recorded 50% against Tier 1 capital and 50% against Tier 2 capital. The full transition to IFRS reduced Tier 1 capital by $50 million compared to the prior quarter (an impact of approximately 40 basis points on the January 31, 2012 Tier 1 and total ratios). The 2011 capital structure and regulatory ratios reflect the returns filed and have not been restated to IFRS. Further details regarding changes in CWB's regulatory capital and capital adequacy ratios compared to prior periods are included in the following table:
| As at
| As at
| As at
January 31 2011
| Change from
|Tier 1 Capital before deductions||$||1,388||$||1,395||$||1,297||$||91|
|Investment in insurance subsidiary||(41)||-||-||(41)|
|Tier 1 Capital||1,290||1,350||1,250||40|
|Tier 2 Capital before deductions||618||607||618||-|
|Less:||Investment in insurance subsidiary||(42)||(81)||(71)||29|
|Total Tier 2 Capital||565||520||538||27|
|Total Regulatory Capital||$||1,855||$||1,870||$||1,788||$||67|
|Tier 1 capital adequacy ratio||10.2||%||11.1||%||11.6||%||(140)||bp(1)|
|Total capital adequacy ratio||14.6||15.4||16.5||(190)|
|(1) bp - basis point change.|
The Bank's capital ratios are currently well above Basel II target ranges established through CWB's Internal Capital Adequacy Assessment Process (ICAAP) and have the Bank well positioned for the remainder of the year. The ongoing retention of earnings should support capital requirements associated with the anticipated achievement of the 2012 minimum performance targets. Management continues to evaluate alternatives to deploy capital for the long-term benefit of CWB shareholders, which includes the potential for strategic acquisitions.
The Bank applied for and received OSFI approval to redeem $125 million of subordinated debentures callable on March 22, 2012. Including the impact of this expected transaction, the estimated pro forma Basel II total capital adequacy ratio at January 31, 2012 would be reduced by 90 basis points to 13.7%.
Additional strategies are under development to further optimize the Bank's capital structure. Management is currently in the early stages of identifying required resources, costs and potential timelines related to the Bank's possible transition to an Advanced Internal Rating Based (AIRB) methodology for managing credit risk and calculating risk-weighted assets. Preliminary analysis confirms a multi-year timeframe would be required to complete the transition.
Further information relating to the Bank's capital position is provided in Note 14 of the unaudited interim consolidated financial statements as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2011.
Book value per common share at January 31, 2012 was $14.36, compared to $13.87 last quarter and $13.95 one year ago.
Common shareholders received a quarterly cash dividend of $0.15 per common share on January 4, 2012. On March 7, 2012, CWB's Board of Directors declared a cash dividend of $0.15 per common share, payable on April 5, 2012 to shareholders of record on March 22, 2012. This quarterly dividend was unchanged from the previous quarter and is 15% higher than the quarterly dividend declared one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on April 30, 2012 to shareholders of record on April 20, 2012.
Basel III Capital Framework
The Basel Committee on Banking Supervision of the BIS (the Committee) has published the Basel III rules text supporting more stringent global standards on capital adequacy and liquidity, and OSFI has confirmed its intent to implement the Basel III rules for Canadian banks. OSFI also issued guidance and advisories on its capital implementation plan for all Canadian financial institutions, including proposed transition allowances and details about the treatment of non-viability contingent capital (NVCC).
Significant capital changes most relevant to CWB include:
- increased focus on tangible common equity;
- all forms of non-common equity, such as conventional subordinated debentures and preferred shares, must be NVCC. Compliant NVCC instruments include a clause requiring conversion to common equity in the event that OSFI deems the institution to be insolvent or a government has decided to inject "bail out" funding;
- innovative Tier 1 instruments, such as CWB's WesTS, will no longer qualify;
- investment in an insurance subsidiary is no longer deducted from capital except for any amount that exceeds 15% of tangible common equity; and
- changes in the risk-weighting or capital treatment for investments in the regulatory capital of other financial institutions.
OSFI has publicly stated that all Canadian banks must comply with the Basel III capital standards, including a 250 basis point capital conservation buffer. Regulatory minimum capital ratios of 7.0% tangible common equity Tier 1 (CET1), 8.5% Tier 1 and 10.5% total capital are effective January 1, 2013. The Basel III rules provide for transitional adjustments whereby certain aspects of the new rules will be phased in over time. The only available transitional adjustment in the Basel III capital standards permitted by OSFI for Canadian banks relates to the 10-year phase out of non-qualifying capital instruments. Application of the proposed 2019 Basel III standards to the Bank's financial position at January 31, 2012 results in a 7.5% CET1 ratio, 8.2% Tier 1 ratio and 11.9% total capital ratio. The foregoing estimates are based on the Bank's current capital structure and composition of risk-weighted assets, and will change depending on strategic initiatives, the composition of regulatory capital, the Bank's financial performance in the future and modifications, if any, to the standards and available transitional adjustments by the regulatory authorities. CWB expects to meet or exceed the stated Basel III capital requirements in advance of the transition date. Management will maintain its practice of prudent capital planning, which includes a comprehensive ICAAP.
Changes in Accounting Policies
International Financial Reporting Standards (IFRS)
The Canadian Institute of Chartered Accountants has transitioned Canadian generally accepted accounting principles (GAAP) for publicly accountable entities to IFRS. The transition is applicable to interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011, including comparatives for the prior year. As a result, CWB's consolidated financial statements for the 2012 fiscal year are prepared in accordance with IFRS, including comparative information for 2011. CWB's financial results for the quarter ending January 31, 2012 are the first quarterly IFRS financial statements.
Information regarding CWB's transition plan, which is now substantially complete, can be found in the Future Changes in Accounting Policies section of the MD&A within CWB's 2011 Annual Report. Additional quantitative information related to the transition to IFRS can be found in Note 15 of the interim financial statements for the period ended January 31, 2012. The adoption of IFRS did not have a significant impact on CWB's disclosure controls and procedures, information technology or business activities.
Significant accounting policy differences for the Bank on initial transition to IFRS and any elections made are described below.
(1) Business Combinations - Under IFRS, contingent consideration related to a business combination is accounted for as a financial liability and fair valued at the time of the acquisition. An adjustment of the liability to current fair value is recorded through net income every period thereafter until settlement. Under Canadian GAAP, when the amount of contingent consideration or the outcome of the contingency cannot be estimated with reasonable certainty, the liability is not recognized until the contingency is resolved and consideration is issued or becomes issuable; at such time, the consideration is recorded as an adjustment of goodwill.
The Bank has applied IFRS 3 - Business Combinations retrospectively to the acquisition of National Leasing Group Inc. (National Leasing) (described in Note 34 to the 2011 annual consolidated financial statements on page 119 of the 2011 Annual Report). Under IFRS 1 - First Time Adoption of IFRS, the estimated fair value of the associated contingent consideration at the acquisition date of February 1, 2010 was recorded at the acquisition date.
The retrospective restatement increased goodwill recorded on the consolidated balance sheet at November 1, 2010 by $8 million. The revaluation of the contingent consideration since acquisition decreased retained earnings at November 1, 2010 by $10 million. The net effect of revaluing the obligation in fiscal 2011 resulted in a $12 million reduction in net income.
The change in fair value of the contingent consideration reflects the Bank's best estimate of when the contingent consideration will be settled in accordance with the terms of the purchase agreement, and estimates of future earnings of National Leasing. Increases in the estimated fair value of the contingent consideration result in a non-tax deductible charge to earnings based on forecasted earnings growth attributable to National Leasing, changes in management's estimates of the expected settlement date of the contingent consideration and a notional interest charge. Future charges to quarterly earnings attributable to the fair value estimate of the contingent consideration are expected to be lower compared to amounts reported in 2011, as prior year charges included a larger adjustment to forecasted net income than is expected going forward.
(2) Derecognition of Securitized Financial Assets - CWB's securitized leases are reported as loans on the IFRS balance sheet which resulted in an increase in both loans and debt. The corresponding impact on net income in fiscal 2011 was insignificant. The IFRS transition resulted in the following increase in total loans at the respective balance sheet dates:
|($ millions)|| Increase in
|November 1, 2010||$196|
|January 31, 2011||167|
|April 30, 2011||140|
|July 31, 2011||114|
|October 31, 2011||90|
The earnings effect of securitization as reported under IFRS resulted in a $2 million decrease in retained earnings as at November 1, 2010. The change reflects the elimination of cumulative securitization gains and losses realized under Canadian GAAP, less recognition of interest income and expense under IFRS. The net effect on 2011 consolidated net income was an increase of $1 million.
The future earnings impact from securitization transactions completed prior to October 31, 2011 is expected to be insignificant. Leases securitized in the future will remain on the consolidated balance sheet reported as loans.
(3) Consolidation - Under IFRS, a special purpose entity is consolidated if it is deemed to be controlled by the reporting entity, as determined under specific criteria. Canadian Western Bank Capital Trust is consolidated under IFRS, which resulted in a $105 million decrease in deposits and the presentation of the CWB Capital Trust Capital Securities Series 1 (WesTS) as equity attributed to non-controlling interests. Distributions on the WesTS that were effectively reported as deposit interest expense are now presented as an equity dividend within IFRS "net income attributable to non-controlling interests." For more information about this special purpose entity, refer to Note 15 to the consolidated financial statements beginning on page 100 of the 2011 Annual Report.
The net effect on 2011 consolidated "net income" effectively resulted in an increase of $7 million as the deposit interest expense under Canadian GAAP is treated as an equity dividend payment under IFRS. "Net income attributable to shareholders of the Bank" is reported net of the non-controlling interest and was not affected in 2011 by this accounting policy difference.
(4) Impairment of Available-for-Sale Securities - Under both Canadian GAAP and IFRS, available-for-sale securities are reported on the balance sheet at fair value with changes in fair value generally reported in other comprehensive income. An unrealized loss is recognized in net income when a security is considered impaired; a subsequent recovery in the value of an equity security is not reversed through net income until the security is either sold or redeemed. Under Canadian GAAP, a significant or prolonged decline in the fair value of an investment below its cost is assessed in the context of whether it is considered an "other than temporary impairment" (OTTI). Under IFRS, the concept of OTTI does not exist and either a significant or prolonged decline in fair value is considered objective evidence of impairment. The differences between Canadian GAAP and IFRS will generally result in earlier recognition of impairment losses through net income under IFRS.
There was no change in shareholders' equity and a $2 million reduction in 2011 net income as a result of the transition. The impact of the IFRS definition of significant or prolonged impairment on the Bank's future earnings is not determinable as it depends on future interest rate environments, market conditions, investment strategies and the Bank's asset/liability position.
(5) Other Reclassifications - Certain other financial statement reclassifications have been made on the transition to IFRS. An example includes the presentation of the non-controlling interest in Adroit Investment Management Ltd. which has been reclassified from other liabilities under Canadian GAAP to non-controlling interests (presented in equity) under IFRS.
In addition to the IFRS transition adjustments previously described, the recognition of certain credit related fees was also amended. Certain credit related fees, previously recognized in other income, are now reflected as part of the loan yield and amortized to net interest income over the expected life of the loan. Because total loans are reported net of deferred loan fees, this change resulted in a decrease in total loans of $18 million at both November 1, 2010 and October 31, 2011, and a reduction in retained earnings of $13 million at November 1, 2010. While the change had no impact on 2011 net income, approximately $15 million was reclassified from other income to net interest income resulting in a 17 basis point increase in the fiscal 2011 IFRS net interest margin (teb) compared to Canadian GAAP. The impact on the income statement in future periods is expected to be relatively consistent with 2011.
IFRS Regulatory Capital Implications
As at January 31, 2012, the Basel II Tier 1 and total regulatory capital ratios declined approximately 40 basis points as a result of the transition to IFRS. After adjusting for the effect of the IFRS transition, these ratios remain well above both regulatory minimums and target capital thresholds determined through the Bank's ICAAP.
Under IFRS, the Bank's securitized leases are accounted for as secured borrowings. Recognition of securitized assets on the consolidated balance sheet increases the regulatory assets to capital multiple. As at January 31, 2012, the assets to capital multiple increased slightly from 8.1 to 8.3 as a result of the IFRS transition adjustment and still remains well within the regulatory limit.
Future Accounting Changes
A number of standards and amendments have been issued by the International Accounting Standards Board (IASB), and the following changes may have an impact on the Bank's future financial statements. CWB is currently reviewing these standards to determine the impact on the financial statements.
IFRS 9 - Financial Instruments
The IASB deferred the mandatory effective date of IFRS 9 to annual periods beginning on or after January 1, 2015. The new standard specifies that financial assets be classified into one of two categories on initial recognition: financial assets measured at amortized cost or financial assets measured at fair value. Gains or losses on remeasurement of financial assets measured at fair value will generally be recognized in profit or loss.
IFRS 10 - Consolidated Financial Statements and IFRS 12 - Disclosure of Interests in Other Entities
The IASB has issued IFRS 10 and 12, which establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities, and new disclosure requirements for all forms of interests in other entities. IFRS 10 and 12 are effective for annual periods beginning on or after January 1, 2013.
IFRS 13 - Fair Value Measurement
The IASB has issued new guidance on fair value measurement and disclosure requirements for IFRS. The amendments are effective for annual periods beginning on or after January 1, 2013.
CWB continues to monitor IASB ongoing activity and proposed changes to IFRS. Several accounting standards that are in the process of being amended by the IASB (i.e. loan impairment, leases and insurance) may have a significant impact on the Bank's future consolidated 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, 2012 that have materially affected, or are reasonably likely to materially affect, the Bank's internal controls over financial reporting.
Prior to its release, this quarterly report to shareholders was reviewed by the Audit Committee and, on the Audit Committee's recommendation, approved by the Board of Directors of Canadian Western Bank.
Updated Share Information
As at March 2, 2012, there were 75,694,379 common shares outstanding. Also outstanding were employee stock options, which are or will be exercisable for up to 3,915,337 common shares for maximum proceeds of $88 million.
Normal Course Issuer Bid
CWB received approval from the Toronto Stock Exchange for a Normal Course Issuer Bid (NCIB) to purchase, for cancellation, up to 2,261,434 of its common shares. The NCIB commenced November 2, 2011 and will end no later than November 1, 2012. To date, no common shares have been purchased or cancelled under the NCIB. Security holders may contact the Bank to obtain, without charge, a copy of the notice filed with the TSX. Additionally, a copy of the NCIB news release is available on the Bank's website and on SEDAR at www.sedar.com.
Dividend Reinvestment Plan
CWB common shares (TSX: CWB) and preferred shares (TSX: CWB.PR.A) are deemed eligible to participate in the Bank's dividend reinvestment plan (the Plan). The Plan provides holders of eligible shares the opportunity to direct cash dividends toward the purchase of CWB common shares. Further details for the Plan are available on the Bank's website at www.cwbankgroup.com/investor_relations/drip. At the current time, for the purposes of the Plan, the Bank has elected to issue common shares from treasury at a 2% discount from the average market price (as defined in the Plan).
Summary of Quarterly Financial Information
|Total revenues (teb)||$||126,300||$||119,673||$||122,753||$||119,766||$||121,363||$||111,570||$||111,045||$||110,972|
| Net income available to
|Earnings per common share|
|Total assets ($ millions)||15,484||14,849||14,097||13,726||13,099||12,702||12,110||12,004|
The financial results for each of the last eight quarters are summarized above. Note that 2010 results are presented under Canadian GAAP and have not been restated to IFRS. 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, are subject to seasonal weather conditions, cyclical patterns of the industry and natural catastrophes. Mandatory participation in the Alberta auto risk sharing pools can also result in unpredictable quarterly fluctuations.
Quarterly results can also fluctuate from the recognition of periodic income tax items, as was the case in the third quarter of 2010 when an income tax recovery from certain prior period transactions increased net income available to common shareholders by approximately $7.5 million.
For additional 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, 2011 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.
Fiscal 2012 Minimum Targets and Outlook
The minimum performance targets established for the 2012 fiscal year, calculated under IFRS, together with CWB's actual year-to-date performance are presented in the table below:
Target - IFRS
|Net income available to common shareholders growth(1)||10%||10%|
|Total revenue (teb) growth(1)||7%||4%|
|Provision for credit losses as a percentage of average loans(3)||0.20% - 0.25%||0.20%|
|Efficiency ratio (teb)(4)||46%||43.7%|
|Return on common shareholders' equity(5)||15%||15.5%|
|Return on assets(6)||1.05%||1.07%|
|(1)||Year-to-date performance for earnings and revenue growth is the current year results over the same period in the prior year.|
|(2)||Loan growth is the increase over the past twelve months.|
|(3)||Year-to-date provision for credit losses, annualized, divided by average total loans.|
|(4)||Efficiency ratio (teb) calculated as non-interest expenses divided by total revenues (teb), excluding the non-tax deductible change in fair value of contingent consideration.|
|(5)||Return on common shareholders' equity calculated as annualized net income available to common shareholders divided by average common shareholders' equity.|
|(6)||Return on assets calculated as annualized net income available to common shareholders divided by average total assets.|
Strong first quarter results have CWB well positioned in relation to its fiscal 2012 performance targets for loan growth, profitability, efficiency and overall credit quality. Higher than expected first quarter loan growth reflects ongoing strong business activity in each of the Bank's lending sectors and all key geographic markets. Economic fundamentals in Western Canada are expected to remain favourable relative to the rest of Canada, although management continues to closely monitor global economic developments, including potential adverse impacts from the ongoing European debt crisis. The volume in the new loan pipeline is encouraging and supports management's ongoing confidence in strategies to build market share while maintaining a focus on loans that offer a fair and profitable return on investment. While the combined impact of the strategy to maintain higher than normal liquidity, the very low interest rate environment and other external factors, including increased competition, has had a material impact on net interest margin, recent downward pressure is expected to moderate. This occurrence, combined with strong lending activity, should have a positive influence on total revenue growth moving forward. Solid performance is expected within each company of the CWB Group and the ongoing growth of these businesses should continue to augment earnings and further diversify operations. Despite ongoing caution related to global economic uncertainties, the outlook for 2012 and beyond remains positive.
This management's discussion and analysis is dated March 7, 2012.
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 IFRS 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.
Taxable equivalent basis, adjusted cash earnings per common share, 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 IFRS 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;
- adjusted cash earnings per common share - diluted earnings per common share excluding the after-tax amortization of acquisition-related intangible assets and the non-tax deductible change in fair value of contingent consideration. These exclusions represent non-cash charges mainly related to the acquisition of National Leasing Group Inc. and are not considered to be indicative of ongoing business performance;
- return on common shareholders' equity - annualized net income attributable to shareholders of the Bank after preferred share dividends divided by average common shareholders' equity;
- return on assets - annualized net income attributable to shareholders of the Bank after preferred share dividends divided by average total assets;
- efficiency ratio - non-interest expenses divided by total revenues excluding the non-tax deductible change in fair value of contingent consideration;
- 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;
- Basel III common equity Tier 1, Tier 1 and total capital ratios - in accordance with CWB's interpretation of the Basel III capital requirements and OSFI proposed guidance;
- average balances - average daily balances;
- claims loss ratio - net insurance claims and adjustment expenses as a percentage of net earned premiums; and
- combined ratio - sum of the claims loss ratio and the expense ratio. The expense ratio is defined as policy acquisition costs and non-interest expenses net of commissions and processing fees as a percentage of net earned premiums.
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 2012 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 2012, management's assumptions included: modest economic growth in Canada aided by positive relative performance in the four western provinces; relatively stable energy and other commodity prices; sound credit quality with actual losses remaining within the Bank's historical range of acceptable levels; and, a lower net interest margin attributed to expectations for a prolonged period of very low interest rates due to uncertainties about the strength of global economic recovery and potential adverse effects from the European debt crisis. Management's assumptions at the end of the first quarter remained relatively unchanged compared to those at the 2011 fiscal year end. Major risks that would have a material adverse impact on the Bank's economic expectations and forecasts include a global economic recession spurred by the European debt crisis, a recession in the United States, or a meaningful slowdown in China's economic growth.
Consolidated Balance Sheets
|(unaudited)||As at||As at||As at||As at||Change from|
|($ thousands)|| January 31
| October 31
| January 31
| November 1
| January 31
|Cash and non-interest bearing deposits with financial institutions||$||44,745||$||73,318||$||59,036||$||8,965||(24)||%|
|Interest bearing deposits with regulated financial institutions||(Note 4)||182,427||233,964||219,953||168,998||(17)|
|Cheques and other items in transit||1,792||5,053||941||9,981||90|
|Issued or guaranteed by Canada||680,933||644,356||478,771||564,694||42|
|Issued or guaranteed by a province or municipality||415,166||380,031||187,816||88,478||121|
|Securities Purchased Under Resale Agreements||119,999||-||-||177,954||nm|
|Loans||(Notes 5 and 7)|
|Allowance for credit losses||(Note 6)||(74,556)||(71,980)||(77,593)||(81,523)||(4)|
|Property and equipment||71,439||72,674||66,830||65,978||7|
|Other intangible assets||36,131||37,420||42,027||43,420||(14)|
|Derivative related||(Note 8)||-||-||130||134||nm|
|Liabilities and Shareholders' Equity|
|Payable on demand||$||592,566||$||583,267||$||584,728||$||530,608||1||%|
|Payable after notice||3,610,670||3,407,590||3,110,008||2,999,599||16|
|Payable on a fixed date||8,757,693||8,403,832||6,986,605||7,177,560||25|
|Cheques and other items in transit||32,874||45,986||47,423||39,628||(31)|
|Derivative related||(Note 8)||539||436||812||992||(34)|
|Preferred shares||(Note 9)||209,750||209,750||209,750||209,750||-|
|Common shares||(Note 9)||412,120||408,282||323,608||279,620||27|
|Share-based payment reserve||22,079||21,884||21,089||21,291||5|
|Total Shareholders' Equity||1,296,634||1,256,613||1,182,169||1,122,286||10|