CWB earnings mark 84 consecutive profitable quarters, a period spanning 21 years
Ongoing margin compression adversely impacts total revenues and
profitability
Celebrated the Bank's 25th anniversary
EDMONTON, June 4 /CNW/ - Canadian Western Bank (CWB on TSX) today
announced the achievement of its 84th consecutive profitable quarter, a period
spanning 21 years. Second quarter net income of $21.6 million decreased 15%
compared to the same quarter last year mainly reflecting ongoing margin
compression. The recessionary economic environment and challenging operating
conditions for the financial services sector were additional factors that
impacted performance. Diluted earnings per common share of $0.30 were down 23%
and include the impact of the initial cash dividend ($0.04 per diluted common
share) paid on preferred shares. Quarterly results also included $1.7 million
($0.03 per diluted common share, before and after tax) of additional non-cash,
stock-based compensation expense reflecting required accounting treatment for
stock options voluntarily forfeited by certain CWB management. Total loans
increased 1% in the quarter, 5% year-to-date and 14% over the past twelve
months. Although partially mitigated by gains on the sale of securities,
revenues and overall profitability continued to be adversely affected by a
significantly lower net interest margin. Consecutive reductions in the prime
lending rate were the main factors contributing to quarterly margin
compression. Compared to a year earlier, the prime lending rate decreased 250
basis points to reach its current historic low of 2.25%. Year-to-date net
income of $47.2 million was 8% lower compared to the same period last year,
while diluted earnings per common share decreased 11% to $0.70.
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Second Quarter Highlights:
(three months ended April 30, 2009 compared with three months ended
April 30, 2008 unless otherwise noted)
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- Net income of $21.6 million, down 15% (down 8% excluding the
$1.7 million of additional non-cash, stock-based compensation expense
previously noted).
- Diluted earnings per common share of $0.30, down 23% (down 5%
excluding both the additional non-cash, stock-based compensation
expense and the initial cash dividend paid on preferred shares).
- Completed offerings for a total of 8,390,000 preferred share units
for gross proceeds of $209.8 million.
- Tier 1 capital ratio of 11.0%; total capital ratio of 15.2%.
- Loan growth of 1% in the quarter and 14% over the past twelve months.
- Total revenues (teb(1)) of $75.4 million, up 2%.
- Opened a new trust services office in Toronto (Canadian Western Trust
Company).
- Celebrated the Bank's 25th anniversary.
(1) Taxable equivalent basis. See definition following Financial
Highlights table.
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On June 3, 2009, CWB's Board of Directors declared a cash dividend of
$0.11 per common share, payable on July 2, 2009 to shareholders of record on
June 18, 2009. This quarterly dividend is unchanged from both the previous
quarter and 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 July 31, 2009 to shareholders of record on July 23, 2009.
Banking and trust earnings of $19.4 million were down 16% compared to one
year ago as the positive earnings impact from strong loan growth and a 30%
increase in other income was more than offset by the significantly compressed
net interest margin and higher non-interest expenses. Second quarter net
income from insurance operations of $2.2 million was relatively unchanged from
a year earlier. On a year-to-date basis, banking and trust earnings of $44.2
million were down 7% from 2008, while net income from insurance operations of
$3.0 million decreased 20% reflecting higher claims activity in the British
Columbia (BC) home product line due to severe weather.
"Our second quarter results were as expected given the significant
negative earnings impact from ongoing margin compression, but also as
expected, there is some light on the horizon," said Larry Pollock, President
and CEO. "Interest rates have bottomed, market spreads appear to be
normalizing and deposit costs are trending downwards. These factors, combined
with our ongoing success in repricing new and renewal loan accounts to reflect
current market conditions are very positive indicators as we move forward. We
are now reasonably confident that we are through the worst as it relates to
margin compression, though it will likely take considerable time before we see
a return to historic norms. Margin improvement was evident in the latter part
of the second quarter and we expect this trend will continue for the remainder
of the year."
"Not unlike the rest of the world, Western Canada continues to cope with
a recessionary economic environment and rising unemployment levels, but our
view is that we are well positioned to manage through the remainder of this
cycle," added Pollock. "The economic contraction in our markets has curbed new
deal flow and, in some cases, this has been intensified by aggressive loan
prices being offered by a few of our competitors. Considering expected
paybacks of existing accounts, coupled with a reduction in new loan
applications, we will likely be challenged this year to achieve our 10% annual
loan growth target."
"Gross impaired loans were relatively flat for the quarter due to the
successful resolution of some accounts. Remaining problem accounts are in
various stages of being worked out, which should help stabilize the level of
impaired loans over time. However, it's likely we will see further increases
as we progress through the economic cycle. Based on our current assessment,
actual write-offs are expected to remain within acceptable levels and we will
continue to provision accordingly. At this point, we see no need to adjust our
provisions beyond the targeted level of 15 - 18 basis points of average
loans."
"With the successful closing of our preferred share offerings in the
second quarter, CWB's capital ratios now rank among the strongest of all
Canadian banks. While the placement of these preferred shares has negatively
impacted our net financial results for the short-term, our experienced
executive management team is committed to prudently deploying this capital for
the future benefit of all CWB stakeholders. We are actively evaluating
opportunities and will ensure that any transaction is both strategic and
accretive to our future development."
"We were excited this quarter to celebrate the Bank's 25th anniversary
and marked this significant achievement by hosting events in many of our key
markets, including special receptions in Edmonton, Calgary and Vancouver. Our
Bank was initially formed during challenging economic times that saw many
institutions rein in their exposure in western Canadian markets. Today, we
continue to lend and grow despite economic and market-related challenges. CWB
has demonstrated success in all operating conditions over the past quarter
century and we look forward to further building on this long history,"
continued Pollock.
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Financial Highlights
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For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except April 30 January 31 April 30 April 30
per share amounts) 2009 2009 2008 2008
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Results of Operations
Net interest income
(teb - see below) $ 52,812 $ 54,596 $ 55,659 (5)%
Less teb adjustment 1,675 1,586 1,352 24
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Net interest income
per financial
statements 51,137 53,010 54,307 (6)
Other income 22,570 22,351 18,095 25
Total revenues (teb) 75,382 76,947 73,754 2
Total revenues 73,707 75,361 72,402 2
Net income 21,580 25,619 25,302 (15)
Earnings per common
share
Basic(1) 0.30 0.40 0.40 (25)
Diluted(2) 0.30 0.40 0.39 (23)
Return on common
shareholders'
equity(3) 11.0% 14.7% 16.1% (510)bp(4)
Return on assets(5) 0.70 0.93 1.04 (34)
Efficiency
ratio(6) (teb) 53.1 47.3 45.4 770
Efficiency ratio 54.3 48.3 46.2 810
Net interest margin
(teb)(7) 1.93 1.99 2.28 (35)
Net interest margin 1.87 1.93 2.22 (35)
Provision for credit
losses as a
percentage of
average loans 0.15 0.15 0.15 -
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Per Common Share
Cash dividends $ 0.11 $ 0.11 $ 0.10 10%
Book value 11.42 11.10 10.22 12
Closing market
value 13.35 11.93 24.83 (46)
Common shares
outstanding
(thousands) 63,589 63,468 63,234 1
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Balance Sheet and
Off-Balance
Sheet Summary
Assets $11,450,625 $10,907,072 $10,038,214 14%
Loans 9,041,518 8,993,453 7,942,636 14
Deposits 9,713,334 9,523,097 8,679,024 12
Subordinated
debentures 375,000 375,000 390,000 (4)
Shareholders'
equity 935,753 704,603 646,215 45
Assets under
administration 4,472,060 4,141,064 4,498,560 (1)
Assets under
management 816,600 809,500 - nm
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Capital Adequacy(8)
Tangible common
equity to risk-
weighted assets(9) 7.6% 7.5% 7.9% (30)bp
Tier 1 ratio 11.0 8.7 9.3 170
Total ratio 15.2 13.0 14.0 120
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------------------------------------------------------------
For the six months ended
(unaudited) ------------------------- Change from
($ thousands, except April 30 April 30 April 30
per share amounts) 2009 2008 2008
------------------------------------------------------------
Results of Operations
Net interest income
(teb - see below) $ 107,408 $ 112,705 (5)%
Less teb adjustment 3,261 2,689 21
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Net interest income
per financial
statements 104,147 110,016 (5)
Other income 44,921 35,718 26
Total revenues (teb) 152,329 148,423 3
Total revenues 149,068 145,734 2
Net income 47,199 51,207 (8)
Earnings per common
share
Basic(1) 0.70 0.81 (14)
Diluted(2) 0.70 0.79 (11)
Return on common
shareholders'
equity(3) 12.9% 16.5% (360)bp(4)
Return on assets(5) 0.82 1.05 (23)
Efficiency
ratio(6) (teb) 50.2 44.0 620
Efficiency ratio 51.3 44.8 650
Net interest margin
(teb)(7) 1.96 2.32 (36)
Net interest margin 1.90 2.26 (36)
Provision for credit
losses as a
percentage of
average loans 0.15 0.15 -
------------------------------------------------------------
Per Common Share
Cash dividends $ 0.22 $ 0.20 10%
Book value 11.42 10.22 12
Closing market
value 13.35 24.83 (46)
Common shares
outstanding
(thousands) 63,589 63,234 1
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Balance Sheet and
Off-Balance
Sheet Summary
Assets
Loans
Deposits
Subordinated
debentures
Shareholders'
equity
Assets under
administration
Assets under
management
------------------------------------------------------------
Capital Adequacy(8)
Tangible common
equity to risk-
weighted assets(9)
Tier 1 ratio
Total ratio
------------------------------------------------------------
nm - not meaningful.
(1) Basic earnings per share is calculated as net income less preferred
share dividends divided by the average number of common shares
outstanding.
(2) Diluted earnings per share is calculated as net income less preferred
share dividends divided by the average number of common shares
outstanding adjusted for the dilutive effects of stock options,
warrants and other common stock equivalents.
(3) Return on common shareholders' equity is calculated as annualized net
income after preferred share dividends divided by average common
shareholders' equity.
(4) bp - basis point change.
(5) Return on assets is calculated as annualized net income after
preferred share dividends divided by average total assets.
(6) Efficiency ratio is calculated as non-interest expenses divided by
total revenues.
(7) Net interest margin is calculated as annualized net interest income
divided by average total assets.
(8) Capital adequacy is calculated in accordance with guidelines issued
by the Office of the Superintendent of Financial Institutions Canada
(OSFI).
(9) Tangible common equity to risk-weighted assets is calculated as
shareholders' equity less subsidiary goodwill divided by risk-
weighted assets, calculated in accordance with guidelines issued by
OSFI.
Taxable Equivalent Basis (teb)
Most financial institutions analyze revenue on a taxable equivalent basis
to permit uniform measurement and comparison of net interest income. Net
interest income (as presented in the consolidated statement of income)
includes tax-exempt income on certain securities. Since this income is not
taxable, the rate of interest or dividends received is significantly lower
than would apply to a loan or security of the same amount. The adjustment to
taxable equivalent basis increases interest income and the provision for
income taxes to what they would have been had the tax-exempt securities been
taxed at the statutory rate.
Non-GAAP Measures
Taxable equivalent basis, return on common shareholders' equity, return
on assets, efficiency ratio, net interest margin, provisions for credit losses
as a percentage of average loans and tangible common equity to risk-weighted
assets do not have standardized meanings prescribed by generally accepted
accounting principles (GAAP) and therefore may not be comparable to similar
measures presented by other financial institutions.
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Message to Shareholders
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Canadian Western Bank (CWB or the Bank) reported good second quarter
results amidst falling interest rates, a recessionary environment and ongoing
challenges for the entire financial sector. Highlights included the
achievement of 84 consecutive profitable quarters, a period spanning 21 years,
and the celebration of the Bank's 25th anniversary.
Compared to the prior year, second quarter net income was down 15% to
$21.6 million, while diluted earnings per common share were down 23% ($0.09)
to $0.30. Second quarter diluted earnings per common share includes the impact
from the initial cash dividend paid on the recently issued preferred shares
which totaled $2.5 million ($0.04 per diluted common share). Reported earnings
also include the impact from $1.7 million ($0.03 per diluted common share,
before and after tax) of additional non-cash expense from stock options
voluntarily forfeited by management. The non-cash expense represents required
accounting recognition of the unamortized initial fair value of the forfeited
options. Total revenues, on a taxable equivalent basis (teb - see definition
following Financial Highlights table), increased 2% as the positive impact of
strong loan growth and a 25% increase in other income was largely offset by a
significantly lower net interest margin.
Compared to the previous quarter, consolidated net income decreased 16%
mainly reflecting the impact of higher non-interest expenses, three fewer
revenue earning days in the second quarter and further margin compression.
Diluted earnings per common share were down 25% from last quarter reflecting
the items already noted, including the first cash dividend on the newly issued
preferred shares. On a year-to-date basis, net income was down 8% compared to
the same period last year to $47.2 million, while diluted earnings per share
decreased 11% to $0.70.
The Bank completed offerings in the second quarter for a total of
8,390,000 preferred share units for gross proceeds of $209.8 million. The
success of these public and private placements significantly augments the
Bank's strong balance sheet and provides considerable flexibility to pursue
accretive growth opportunities. The preferred share units were comprised of
one Non-Cumulative 5-Year Rate Reset Preferred Share, Series 3 (the "Series 3
Preferred Share") and common share purchase warrants. Both the Series 3
Preferred Shares and the warrants trade on the Toronto Stock Exchange under
the trading symbols 'CWB.PR.A' and 'CWB.WT' respectively.
Second quarter return on equity of 11.0% decreased 510 basis points
compared to the same period last year, and was down 370 basis points over the
prior quarter. Return on assets of 0.70% declined 34 basis points from a year
earlier and 23 basis points from the previous quarter. Compared to last year,
lower profitability ratios are mainly attributed to the significantly
compressed net interest margin, which continued to be impacted by consecutive
reductions in the prime lending interest rate. The first dividend payment on
the recently completed preferred share offerings also had a negative impact on
both these measures.
Common Share Price Performance
CWB shares ended the second quarter at $13.35, compared to $24.83 a year
earlier. Including reinvested dividends, the total return for shareholders
over the one year holding period ended April 30, 2009 was negative 45%. This
compares to the total return for the S&P/TSX financials index of negative 26%
over the same one year period.
Dividends
On June 3, 2009, CWB's Board of Directors declared a cash dividend of
$0.11 per common share, payable on July 2, 2009 to shareholders of record on
June 18, 2009. This quarterly dividend is unchanged from both the previous
quarter and 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 July 31, 2009 to shareholders of record on July 23, 2009.
Loan Growth
Loan growth of 1% in the quarter, 5% year-to-date and 14% over the past
year confirm the Bank's strategies to expand market presence while proactively
managing the impact of moderated economic activity and lower commodity prices.
We will maintain our focus on strong credit discipline and funding quality
assets that offer a fair and profitable return. Reflecting current economic
conditions and the recessionary environment, new deal flow has slowed
considerably compared to recent prior periods. Although there are ongoing
opportunities to increase market share, we will likely be challenged this year
to achieve our 10% fiscal 2009 loan growth target, particularly in view of
expected loan repayments in the interim construction and equipment financing
portfolios.
Quarterly performance for Optimum Mortgage (Optimum), our alternative
mortgage business, was consistent with moderated residential sales activity,
elevated consumer uncertainty and modified lending terms for certain market
segments. Optimum's total loans of $480 million at quarter end decreased 2%
compared to the prior quarter, but were up 2% year-to-date and 17% over the
past year. Optimum continued to post strong profitability while maintaining a
good overall risk profile. This business has good growth potential over time
and we will maintain our efforts to selectively enhance the Bank's position in
this segment of the market.
Credit Quality
Overall credit quality remained sound in a challenging operating
environment for all lending sectors. The level of gross impaired loans
decreased slightly from the prior quarter as the dollar value of resolved
accounts previously classified as impaired exceeded new formations. At quarter
end, the dollar amount attributed to the ten largest non-performing accounts
represented approximately 53% of the total $107.0 million of gross impaired
loans. The majority of larger accounts classified as impaired are interim
construction loans that display common problems associated with a softening
real estate market, cost escalations during construction and an inability for
the borrower to access additional capital. The Bank is in varying stages of
enforcing its security to recoup its loans on these projects. Estimated
write-offs from all existing loans classified as impaired are reflected in the
specific provisions for credit losses and have been established based on
current assessments of security held against these accounts. The current
quarterly provision for credit losses of $3.4 million is in line with our
fiscal 2009 performance target range of 15 to 18 basis points of average
loans. Based on our present view of credit quality, taking into consideration
CWB's strong underwriting discipline and secured lending practices, loan
losses should remain within the Bank's historic range of acceptable levels.
Branch Deposit Growth
Deposits raised through our branch network and Canadian Western Trust
Company decreased 2% compared to both the previous quarter and one year ago.
The slight decline in total branch deposits was more than offset by an
increase in retail term deposits raised through the Bank's deposit broker
network. The demand and notice component within branch-raised deposits was up
7% in the quarter and was relatively unchanged compared to a year earlier.
Further diversifying our funding mix remains a key strategic priority and we
are optimistic about several opportunities in this regard. Our experience to
date with the Internet-based division of the Bank named Canadian Direct
Financial(TM) (www.canadiandirectfinancial.com) shows potential, but is still
in the early stages of its development.
Net Interest Margin
Compressed net interest margin due to consecutive reductions in the prime
lending rate continued to have a significant negative impact on growth in both
total revenues and overall profitability. Second quarter net interest margin
(teb) was 1.93%, down 35 basis points compared to a year earlier and six basis
points lower than the previous quarter. On a more positive note, the prime
lending rate has bottomed, market spreads appear to be returning to more
normal levels and overall deposit costs continue to ease. The foregoing
factors, combined with our success in pricing new and renewal loan accounts to
ensure a fair and profitable return in the context of today's markets, support
our expectation that net interest margin will gradually return to historic
levels. An improved net interest margin was evident in the latter part of the
quarter. To the extent possible, without foregoing overall investment quality
and future income, we will look for further opportunities to augment the
Bank's financial results by realizing gains on sale of securities and
improving investment yields.
Trust and Wealth Management Services
Canadian Western Trust Company posted another quarter of solid financial
performance and increased its market presence with the opening of a new trust
services office in Toronto. Valiant Trust Company (Valiant) continues to
manage in a very difficult operating environment attributed to a marked slow
down in capital markets activity. Valiant is actively evaluating opportunities
to further enhance and diversify its product delivery and revenue streams
going forward. Adroit Investment Management Ltd., the most recent addition to
the CWB Group, presents opportunities to improve and expand upon the Bank's
product offerings, and we are excited about the doors that this new business
line will open in the future.
Insurance
Our insurance subsidiary, Canadian Direct Insurance Incorporated
(Canadian Direct or CDI), showed much improved results after a difficult first
quarter that was impacted by a high level of claims in its BC Home product
line due to severe weather. Barring the occurrence of further severe weather
or other catastrophe type events, we expect the contribution from insurance
operations to improve over the balance of the year.
Outlook
Second quarter and year-to-date results reflect market realities given
the significant impact from ongoing margin compression and the current
recessionary operating environment. Margin pressure showed signs of easing
near the end of the quarter and net interest margin should begin to trend
slowly upward through the rest of this year. While this will positively impact
earnings and revenues in future periods, it is unlikely we will meet our
fiscal 2009 performance targets related to profitability. Economic activity
has slowed in our markets much more than expected when we started the year and
asset growth will likely be constrained as well. That being said, our solid
balance sheet and capital base puts us in an excellent position to take
advantage of opportunities resulting from recent turmoil. We are very
confident that the Bank will emerge from this cycle stronger than ever and
that our geographic focus in Western Canada will further our ability to manage
through current challenges. Our overall outlook is positive and our ongoing
commitment to CWB stakeholders is to continually enhance and execute our
strategies focused on creating value and growth over the long-term.
We look forward to reporting our fiscal 2009 third quarter results on
September 3, 2009.
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Q2 Results Conference Call
CWB's second quarter results conference call is scheduled for Thursday,
June 4, 2009 at 3:00 p.m. ET (1:00 p.m. MT). The Bank's executives will
comment on financial results and respond to questions from analysts and
institutional investors.
The conference call may be accessed on a listen-only basis by dialing
416-644-3423 or toll-free 1-800-732-9303. 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 June 18, 2009 by
dialing 416-640-1917 (Toronto) or 1-877-289-8525 (toll-free) and entering
passcode 21305850, followed by the pound sign.
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About Canadian Western Bank
Canadian Western Bank offers highly personalized service through 36
branch locations and is the largest publicly traded Schedule I chartered bank
headquartered in Western Canada. The Bank, with total balance sheet assets of
more than $11 billion, assets under administration of over $4 billion and
assets under management approaching $1 billion, specializes in mid-market
commercial lending and offers a full range of retail banking services. Trust
services to independent financial advisors, corporations, income trusts and
individuals are provided through the Bank's subsidiaries, Canadian Western
Trust Company and Valiant Trust Company. Canadian Direct Insurance
Incorporated is a subsidiary that offers personal auto and home insurance to
customers in BC and Alberta. Subsidiary Adroit Investment Management Ltd.
provides wealth management services to individuals, corporations and
institutional clients. The common shares of Canadian Western Bank are listed
on the Toronto Stock Exchange under the trading symbol 'CWB'. The Bank's
Series 3 preferred shares and common share purchase warrants trade on the
Toronto Stock Exchange under the trading symbols 'CWB.PR.A' and 'CWB.WT'
respectively. Refer to www.cwbankgroup.com for additional information.
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Management's Discussion and Analysis
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This management's discussion and analysis (MD&A) should be read in
conjunction with Canadian Western Bank's (CWB or the Bank) unaudited interim
consolidated financial statements for the period ended April 30, 2009, as well
as the audited consolidated financial statements and MD&A for the year ended
October 31, 2008, available on SEDAR at www.sedar.com and the Bank's website
at www.cwbankgroup.com. Except as discussed below, the factors discussed and
referred to in the MD&A for fiscal 2008 remain substantially unchanged.
Overview
CWB's second quarter financial results were consistent with a
recessionary economic environment and very challenging operating conditions
for the financial services industry. Quarterly net income from banking and
trust operations of $19.4 million was down 16% ($3.7 million) compared to one
year ago as positive earnings contributions from strong 14% loan growth and a
$4.4 million increase in gains on sale of securities were more than offset by
a significantly lower net interest margin, measured on a taxable equivalent
basis (teb - see definition following Financial Highlights table), and a 20%
($6.2 million) increase in non-interest expenses. Gains on the sale of
securities reflect market conditions that allowed the Bank to capitalize on
favourable prices on certain short-term investments. The quarterly increase in
non-interest expenses included $1.7 million ($0.03 per diluted common share,
before and after tax) of additional non-cash stock-based compensation expense
attributed to employee stock options voluntarily forfeited by management.
Canadian Direct Insurance Incorporated (Canadian Direct or CDI) recorded net
income of $2.2 million, relatively unchanged compared to a year earlier.
Consolidated second quarter net income decreased 15% from one year ago to
$21.6 million, representing $0.30 ($0.30 basic) per diluted common share.
Compared to the previous quarter, consolidated net income decreased 16%
($4.0 million) mainly reflecting a 10% ($3.6 million) increase in non-interest
expenses, including the above noted non-cash stock compensation expense, three
fewer revenue earning days, the compressed net interest margin (teb) and $1.6
million lower gains on sale of securities. These factors were partially offset
by a $2.1 million improvement in net insurance revenues reflecting a difficult
first quarter that was impacted by severe weather. Consolidated net income
year-to-date of $47.2 million was down 8% ($4.0 million) compared to the same
period in 2008, while diluted earnings per share decreased 11% to $0.70.
Second quarter return on common shareholders' equity of 11.0% decreased
from 16.1% a year earlier and 14.7% last quarter. Return on assets was 0.70%,
compared to 1.04% a year earlier and 0.93% in the prior quarter. Year-to-date
return on common shareholders' equity of 12.9% represented a 360 basis point
decline compared to the same period in 2008, while return on assets was down
23 basis points to 0.82%. Although partially offset by strong growth in other
income, profitability ratios were negatively impacted by both constrained
total revenues due to a significantly lower net interest margin and higher
non-interest expenses. Compared to prior periods, dividends on CWB's recently
completed preferred share offerings further reduced profitability ratios.
Excluding the impact of the initial cash dividend paid on preferred shares,
second quarter return on common shareholders' equity would have been 12.4%,
while return on assets would have been 0.79%. Management's success in
prudently leveraging the preferred share capital is expected to become
accretive to earnings over time.
Total Revenues (teb)
Total revenues (teb), comprised of net interest income and other income,
of $75.4 million were up 2% ($1.6 million) compared to the same quarter last
year as the positive impact from strong loan growth and a 25% ($4.5 million)
increase in other income, including an additional $2.0 million of gains on
sale of securities, offset a significantly lower net interest margin. Compared
to last quarter, total revenues (teb) were down 2% ($1.6 million) reflecting a
3% ($1.8 million) decline in net interest income (teb) due to three fewer days
and further reductions in the prime lending interest rate, partially offset by
slightly improved other income. Total revenues (teb) year-to-date of $152.3
million were up 3% ($3.9 million) over the same period last year as a 26%
($9.2 million) increase in other income and continued loan growth mitigated
the impact of lower margin and one less revenue earning day this year.
Net Interest Income (teb)
Quarterly net interest income (teb) of $52.8 million was down 5% ($2.8
million) compared to the same period last year as the positive revenue impact
from strong loan growth was more than offset by a 35 basis point decline in
net interest margin (teb) to 1.93%. Compared to last year, second quarter net
interest margin was mainly affected by consecutive reductions in the prime
lending interest rate and lower yields on investments held in the securities
portfolio, partially offset by lower deposit costs, more favourable spreads on
both new and renewal loans and an improved mix in the securities portfolio.
Reductions in the prime interest rate negatively impact net interest margin
because deposits do not reprice as quickly as prime-based loans, which
subsequently compresses the interest spread earned on the Bank's assets. Also,
the marginal benefit attributed to the Bank's lower cost demand and notice
deposits is significantly reduced as interest rates approach zero.
Net interest income (teb) was down 3% ($1.8 million) compared to the
previous quarter reflecting a six basis point decline in net interest margin
(teb) and three fewer interest earnings days in the second quarter. The drop
in net interest margin compared to the prior quarter was due to further
reductions in the prime lending rate and increased liquidity, partially offset
by lower deposit costs. Year-to-date net interest income (teb) of $107.4
million represented a 5% decline from the first six months of fiscal 2008
resulting from a 36 basis point decline in net interest margin and one less
interest earning day this year. The lower net interest margin compared to last
year on a year-to-date basis was mainly attributed to the factors already
noted.
Note 13 to the unaudited interim consolidated financial statements
summarizes the Bank's exposure to interest rate risk as at April 30, 2009.
Interest rate risk or sensitivity is defined as the impact on net interest
income, both current and future, resulting from a change in market interest
rates. Based on the interest rate gap position at April 30, 2009, it is
estimated that a one-percentage point increase in all interest rates would
increase net interest income by approximately 5.6% ($12.4 million) and
decrease other comprehensive income $23.4 million, net of tax, over the
following twelve months. It is estimated that a one-percentage point decrease
in all interest rates would increase net interest income by approximately 4.8%
($10.5 million) and increase other comprehensive income $23.4 million, net of
tax, over the following twelve months. This compares to January 31, 2009, when
a one-percentage point increase in all interest rates would have increased net
interest income by approximately 5.8% ($12.4 million) and decreased other
comprehensive income $21.4 million, net of tax, over the following twelve
months; the opposite effect would have occurred if all interest rates
decreased. Compared to prior periods, the positive change in interest rate
sensitivity when all interest rates decrease one-percentage point reflects the
potential for a zero percent Bank of Canada overnight interest rate that
effectively puts a floor on the prime lending rate. Interest sensitivity was
high compared to both prior periods and internal target levels reflecting near
zero interest rates, including the effective floor on the prime lending rate,
and abnormal market spreads for conventional financial instruments used to
hedge the Bank's loan portfolio against interest rate risk. Now that interest
rates appear to have reached the bottom of the current cycle, certain interest
rate hedges have been unwound to maximize returns when rates begin to trend
upwards. Management will continue to actively and prudently manage interest
rate sensitivity and related risks.
Other Income
Quarterly other income of $22.6 million was up 25% ($4.5 million) from a
year earlier reflecting $4.6 million higher gains on sale of securities and a
$1.0 million increase in the combined contribution from trust services and fee
income from newly acquired Adroit Investment Management Ltd. (Adroit),
partially offset by 19% ($1.3 million) lower credit related fee income. Gains
on sale of securities reflect market conditions that allowed the Bank to
capitalize on favourable pricing for certain short-term investments while
maintaining comparable yields on reinvestment in other high quality
securities. Second quarter net insurance revenues, retail service revenues,
foreign exchange gains and other were all relatively comparable with 2008
results.
Compared to the previous quarter, other income was up 1% ($0.2 million)
as a $2.1 million increase in net insurance revenues more than offset $1.6
million lower gains on securities sales and a 7% ($0.4 million) decline in
credit related fee income. On a year-to-date basis, other income improved 26%
($9.2 million) reflecting an $11.7 million increase in gains on sale of
securities, 19% ($1.3 million) higher trust and wealth management fee income
and a $0.4 million improvement in foreign exchange gains, offset by 20% ($2.8
million) lower credit related fee income, consistent with decreased loan
volumes, and a 14% ($1.0 million) decline in net insurance revenues. The
year-to-date decrease in net insurance revenues compared to 2008 reflects high
first quarter claims experience in the British Columbia (BC) home product line
due to severe weather.
Credit Quality
Overall credit quality remained sound in view of a marked economic
slowdown, ongoing market uncertainties and lower commodity prices. While the
Bank's primary markets have been materially impacted by global economic
turmoil, particularly as it relates to demand for commodities, management
believes that Western Canada is much better positioned than the rest of Canada
to manage through these challenges. Measured as a percentage of average loans,
the provision for credit losses of 15 basis points remained unchanged from
both the previous quarter and one year ago. The quarterly dollar provision of
$3.4 million remained unchanged from last quarter and was up from $3.0 million
a year earlier with the increase reflecting ongoing portfolio growth.
For the three months ended
-------------------------------------- Change from
(unaudited) April 30 January 31 April 30 April 30
($ thousands) 2009 2009 2008 2008
-------------------------------------------------------------------------
Gross impaired loans,
beginning of period $ 107,785 $ 91,636 $ 38,947 177%
New formations 29,378 33,028 11,517 155
Reductions, impaired
accounts paid down
or returned to
performing status (27,487) (12,415) (6,381) 329
Write-offs (2,759) (4,464) (1,065) 159
-------------------------------------------------------------------------
Total 107,017 107,785 43,018 149
Balance of the ten largest
impaired accounts 56,478 70,485 26,588 112
Total number of accounts
classified as impaired 204 176 117 74
Total number of accounts
classified as impaired
under $1 million 188 158 106 77
Gross impaired loans
as a percentage of
total loans(1) 1.17% 1.19% 0.54% 63 bp(2)
(1) Total loans do not include an allocation for credit losses or
deferred revenue and premiums.
(2) bp - basis point change.
Gross impaired loans at April 30, 2009 were $107.0 million, compared to
$107.8 million last quarter and $43.0 million a year earlier. The increased
dollar level of gross impaired loans compared to 2008 is largely attributed to
a number of interim construction loans located mainly in smaller markets,
although moderated residential sales activity and resulting impacts on the
Bank's alternative mortgage business were additional contributing factors. The
ten largest accounts classified as impaired measured by dollars represented
approximately 53% of the total gross impaired loans at quarter end. A
softening real estate market, cost escalations during construction and an
inability for the borrower to access additional capital are common themes for
impaired interim construction accounts. The Bank is in varying stages of
enforcing its security to recoup its loans on these projects, as demonstrated
by the second quarter resolution of a large interim construction loan in
Alberta.
The dollar level of gross impaired loans fluctuates as loans become
impaired and are subsequently resolved and does not directly reflect the
dollar value of expected write-offs given the tangible security held against
the Bank's lending positions. Existing loans classified as impaired are well
structured and current estimates of expected write-offs are reflected in the
specific provisions for credit losses. The timeframe required to recover
balances on certain lending facilities classified as impaired has been
lengthened due to the presence of other lenders with charges subordinated to
CWB and slow foreclosure processes on residential real estate in the western
provinces. Despite these challenges, management remains confident about both
the overall quality and ultimate marketability of the security held against
these accounts.
Measured against total loans, gross impaired loans remain within the
Bank's historic range of acceptable levels. Gross impaired loans represented
1.17% of total loans at quarter end, compared to 1.19% last quarter and 0.54%
one year ago. At the end of fiscal 2008, the ten year average for gross
impaired loans measured against total loans was 0.83%, with a high of 1.69% in
1999 and a low of 0.18% in 2006. The average net new specific provisions for
credit losses over the same ten year period noted above was 13 basis points of
average loans (including fiscal 2006 when recoveries exceeded losses). While
the level of impaired loans is likely to increase further amidst a continued
economic contraction, actual losses in consideration of the current operating
environment are expected to remain within the range of acceptable levels.
Based on current credit quality, management expects the fiscal 2009 provisions
for credit losses will remain in the targeted range of 15 - 18 basis points of
average loans.
The total allowance for credit losses (general and specific) represented
70% of gross impaired loans at quarter end, compared to 69% last quarter and
156% one year ago. The general allowance as a percentage of risk-weighted
loans was 74 basis points, unchanged from the previous quarter and down four
basis points from a year earlier. The purpose of the general allowance for
credit losses is to mitigate the impact of unidentified losses in the
portfolio. It is expected that the level of the general allowance will
fluctuate up or down as specific losses are identified and subsequently
charged off, particularly in view of the rapid turn in the credit cycle. The
Bank's long-standing strategy with respect to managing the general allowance
has been to maintain consistent provisions for unidentified losses in the
portfolio during good economic times and help mitigate the need for
disproportionate provisions in less favourable credit environments.
Non-interest Expenses
Second quarter non-interest expenses of $40.0 million increased 20% ($6.5
million) over one year ago and 10% ($3.6 million) over the prior quarter.
Management is committed to strong fiscal responsibility, but effective
execution of CWB's strategic focus on people, process, infrastructure and
business enhancement has necessitated increased spending in some areas. Aside
from the $1.7 million of additional non-cash stock compensation expense,
expenditures are mainly correlated with enhancements to the Bank's growth
platform including additional staff complement, expanded premises and
technology upgrades. These initiatives are directed to increase operating
efficiencies and capacity over time. Spending in these areas is an integral
part of management's commitment to maximize shareholder value over the
long-term and is expected to provide significant benefits in future periods.
Previously announced plans for three new full service branches (Saskatoon,
Kamloops and Surrey) are proceeding with expected opening dates in 2009 and
2010.
Compared to last year, second quarter non-interest expenses reflect a 23%
($4.9 million) increase in salary and benefit costs mainly related to
increased staff complement, annual salary increments and an additional
non-cash, stock-based compensation charge. Total second quarter non-cash,
stock-based compensation charges of $3.0 million included $1.7 million ($0.03
per diluted common share, before and after tax) of additional expense
reflecting required accounting treatment for stock options voluntarily
forfeited by management. Premises and equipment expenses, including
depreciation and costs related to the new branch location in Leduc, Alberta,
were up $1.0 million in the aggregate over the same quarter last year. Other
expenses increased $0.8 million. Second quarter non-interest expenses related
to newly acquired Adroit were $0.7 million, including the associated
amortization of intangible assets.
During the quarter, certain CWB employees voluntarily and irrevocably
released, without consideration, all right, title and interest in 1,283,062
stock options. The related $1.7 million of additional non-cash expense
represents the required accounting recognition of the unamortized initial fair
value of these forfeited options. While stock options had historically been an
efficient and cost effective employee compensation and retention incentive, it
currently represents a material non-cash expense that is no longer adding
value for shareholders due to CWB's significantly depressed share price
attributed to the market's broad sell-off of equities, particularly those in
the financial sector. In light of the foregoing, the Board of Directors, in
consultation with external consultants and senior management, has approved
enhancements for the Bank's existing long-term employee compensation program
to add a restricted share unit component and to reduce the future component of
stock options. The objective of the new program is to increase overall
employee retention for the Bank and to better align CWB's long-term
compensation with industry practices.
Compared to the prior quarter, $2.8 million of the $3.6 million increase
in non-interest expenses was attributed to salary and benefit costs, including
the previously mentioned accelerated non-cash, stock based compensation
charge. The remainder of the difference reflects a $0.5 million increase in
premises and equipment expense, $0.2 million of additional provincial capital
tax associated with the Bank's recently completed preferred share offerings,
and $0.6 million higher marketing and product development costs, partially
offset by lower other expenses. Year-to-date non-interest expenses of $76.4
million were up 17% ($11.1 million) over the same period last year reflecting
$8.1 million higher salary and benefit costs due to increased staff
complement, annual salary increments and non-cash, stock-based compensation
charges, while premises and equipment expenses increased 15% ($1.7 million).
Year-to-date non-interest expenses related to Adroit were $1.4 million,
including amortization of intangible assets.
The second quarter efficiency ratio (teb), which measures non-interest
expenses as a percentage of total revenues (teb), was 53.1%, compared to 45.4%
last year and 47.3% in the previous quarter. The considerable deterioration of
this measure compared to the same quarter last year reflects the negative
impact on total revenues from the significantly compressed net interest
margin, coupled with higher non-interest expenses, partially offset by the
positive impact from strong loan growth and increased other income, including
gains on sale of securities. Compared to the prior quarter, the efficiency
ratio reflects the combined negative impact from increased non-interest
expenses and the compressed net interest margin, slightly offset by higher
other income and loan growth. The year-to-date efficiency ratio (teb) of 50.2%
represented a 620 basis point deterioration from the same period last year and
was 120 basis points off the Bank's fiscal 2009 targeted range of 46 - 49%.
The efficiency ratio (teb) will improve as the net Bank's interest margin
trends back towards historic levels. Controls on discretionary spending should
further support modest improvement to this measure through the remainder of
2009.
Income Taxes
The income tax rate (teb) for the first six months of 2009 was 31.6%,
down 220 basis points from one year ago, while the tax rate before the teb
adjustment was 28.2%, or 320 basis points lower. The income tax provision in
the first six months of 2008 included $1.0 million of additional tax expense
that resulted from the write-down of future tax assets to reflect lower future
federal corporate income tax rates. Excluding this additional fiscal 2008 tax
expense, the current year's income tax rate (teb) was 90 basis points lower
than a year earlier.
Effective July 1, 2008, the corporate provincial income tax rates in BC,
Saskatchewan and Manitoba each decreased 100 basis points to 11%, 12% and 13%
respectively. The federal corporate income tax rate was reduced from 19.5% to
19.0%, effective January 1, 2009. The corporate income tax rate in Manitoba
will decrease from 13% to 12% effective July 1, 2009. Looking forward, the
reductions in income tax rates will have a positive impact on overall tax
rates and cash tax paid on future earnings.
On April 1, 2009, CWB's capital tax rate in BC decreased to 0.33%, down
from 0.67%, and is expected to be eliminated completely by April 1, 2010.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
income (OCI) all net of income taxes, and totaled $32.1 million for the second
quarter, compared to $26.9 million in the same period last year. As previously
noted, net income was down 15% ($3.7 million) compared to one year ago.
However, OCI increased due to higher unrealized gains on available-for-sale
cash and securities and on derivative instruments designated as cash flow
hedges, which reflects market value fluctuations related to changes in market
credit spreads, interest rates and shifts in the interest rate curve. These
increases were partially offset by higher realized gains on sale of securities
reclassified to other income, higher amounts reclassified to net interest
income related to derivatives designated as cash flow hedges, and an increase
in realized gains on the unwinding of interest rate swaps in the second
quarter of 2009 compared to a year earlier.
Balance Sheet
Total assets were up 5% ($544 million) in the quarter and 14% ($1,412
million) in the past year to reach $11,451 million at April 30, 2009.
Cash and Securities
Cash, securities and securities purchased under resale agreements totaled
$2,222 million at April 30, 2009, compared to $1,724 million last quarter and
$1,935 million one year ago. The unrealized gain recorded on the balance sheet
at April 30, 2009 was $10.8 million, compared to an unrealized loss of $13.2
million last quarter and an unrealized gain of $0.2 million one year ago. The
reduction in unrealized losses compared to last quarter is primarily
attributed to a market value improvement in the Bank's preferred share
portfolio. Unrealized losses in the Bank's preferred share portfolio totaled
$14.6 million as at April 30, 2009, compared to $25.8 million last quarter and
$4.0 million a year earlier. The cash and securities portfolio is mainly
comprised of high quality debt instruments that are not held for trading
purposes and, where applicable, are typically held until maturity.
Fluctuations in fair value are generally attributed to changes in interest
rates, market credit spreads and shifts in the interest rate curve.
Realized gains on sale of securities in the second quarter were $6.6
million, compared to $8.1 million in the previous quarter and $2.0 million in
the same quarter last year. The difference in realized gains on sale of
securities compared to the prior year mainly resulted from transactions
related to favourable pricing on certain investment grade, short-term debt
investments. Market conditions allowed the Bank to capitalize on opportunities
to realize gains while maintaining comparable yields on reinvestment in other
investment-grade securities. The Bank has no direct exposure to any troubled
asset backed commercial paper, collateralized debt obligations, credit default
swaps, U.S. subprime lending or monoline insurers.
Treasury Management
High liquidity levels have been maintained since August 2007 in response
to disruptions and related uncertainties in financial markets. Although this
strategy has a negative impact on net interest margin, it reflects the Bank's
conservative risk tolerance and augments its strong position to manage future
unexpected events. Average liquidity balances in the second quarter were
higher than both the prior period and the same quarter last year with the
increase mainly reflecting proceeds from the Bank's completed preferred share
offerings. Comparatively slower loan growth coupled with a strong market
demand for insured deposits also contributed to increased liquidity in the
quarter. The Bank has implemented improved methodologies for measuring and
monitoring liquidity and has also enhanced its deposit monitoring
capabilities. This has enabled management to better assess risks under various
scenarios and to decrease the level of liquid asset coverage on a general
basis. Overall liquidity is expected to decrease in future periods, although
elevated levels will be maintained compared to what would be held under more
normal market conditions. Management intends to maintain this strategy until
market uncertainties subside.
Loans
Total loans grew 1% ($48 million) in the quarter and 14% ($1,099 million)
in the past twelve months to reach $9,042 million. Growth was achieved across
all western provinces except Alberta. Measured by lending sector, quarterly
growth was attributed to real estate and general commercial lending, while the
equipment financing, energy and personal lending sectors all showed marginal
declines due to lower loan demand in the recessionary environment. Looking
forward, quarterly loan growth is expected to remain constrained compared to
prior periods. The recessionary environment, including moderated residential
sales and construction activity in Western Canada, will continue to have an
adverse impact on growth in several lending areas, particularly in the Bank's
real estate construction and equipment financing portfolios. Construction
loans are relatively short in duration and there are now far fewer quality
lending opportunities in this area. The equipment financing portfolio also has
a short duration with loans fully repaid over a period of three-to-five years.
Ongoing challenges related to softness in the forestry and natural gas
services industries are expected to persist and this will have a continued
negative impact on loan demand related to these areas. The near-term outlook
for crude oil and natural gas production is also uncertain and subject to
fluctuations correlated with the underlying resource prices and drilling
activity. The competitive environment has changed and there are opportunities
to increase market share across all lending sectors, but CWB will be
challenged to meet its 10% loan growth target for fiscal 2009. Despite ongoing
challenges, management still believes Western Canada is in a good position
relative to the rest of Canada to manage through ongoing economic turbulence
and a recessionary environment.
Loans in the Bank's alternative mortgage business, Optimum Mortgage
(Optimum), decreased 2% in the quarter, but were up 2% year-to-date and 17%
over the past twelve months to reach $480 million. Though the level of deals
received remained on par with prior periods, the percentage of loan
applications that met the Bank's underwriting criteria dropped considerably.
An increased level of approved deals not accepted by clients due to elevated
consumer uncertainties also had impacted growth in the quarter. It is expected
that growth in this business will continue to be constrained until the
recession runs its course and real estate values stabilize across all markets.
Moderated residential sales activity also impacts marketing time for homes in
foreclosure. Longer marketing time has contributed to a higher level of
delinquent loans, although activity has improved of late, partially due to
seasonal factors. The Bank remains well secured via conventional residential
first mortgages carrying a weighted average underwritten loan-to-value ratio
at initiation of approximately 70%. The vast majority of all Optimum mortgages
carry a fixed interest rate with the principal amortized over 25 years or
less. Management remains committed to grow this business over time as it
continues to produce solid returns while maintaining an acceptable risk
profile.
Deposits
Total branch deposits were down 2% compared to both the previous quarter
and the same period last year. The demand and notice component within branch
deposits was up 7% from last quarter and remained relatively unchanged
compared to a year earlier. Reflecting CWB's business banking focus, a
material portion of total branch deposits are attributed to larger commercial
balances that can be subject to greater fluctuation. The recently introduced
Internet-based division of the Bank named Canadian Direct Financial(TM)
(www.canadiandirectfinancial.com) is still in the early stages of development
as management determines the most beneficial strategies to raise deposits
through this medium. More normal financial markets and reduced competitive
influences have eased overall deposit costs for both branch-generated deposits
and those raised through the deposit broker network. Under the assumption that
interest rates remain at current levels, this will have a positive impact on
net interest margin going forward, particularly as a large component of
comparatively higher cost deposits raised through the latter half of the
calendar year 2008 begin to reprice.
Total deposits at quarter end were $9,713 million, up 2% ($190 million)
from the previous quarter and 12% ($1,034 million) over the past year. Total
branch deposits measured as a percentage of total deposits were 56% at April
30, 2009 down from 58% in the previous quarter and 64% a year earlier.
Compared to prior periods, the reduction in branch-raised deposits as a
percentage of total deposits mainly reflects a marked increase in fixed rate
term deposits raised through the deposit broker network. Demand and notice
deposits represented 26% of total deposits, compared to 25% in the previous
quarter and 29% at the same time last year. The year-over-year decrease in
demand and notice deposits as a percentage of total deposits again reflects
deposits raised through the deposit broker network.
Other Assets and Other Liabilities
Other assets at April 30, 2009 totaled $187 million, compared to $190
million last quarter and $161 million one year ago. Other liabilities at
quarter end were $427 million, compared to $304 million the previous quarter
and $323 million last year. The increase in other liabilities compared to
prior quarters mainly reflects the use of reverse resale agreements.
Off-Balance Sheet
Off-balance sheet items include trust assets under administration and
assets under management. Trust assets under administration totaled $4,472
million at April 30, 2009, compared to $4,141 million last quarter and $4,499
million one year ago. Assets under management were $817 million at quarter
end, compared to $810 million last quarter and nil one year ago reflecting the
December 2008 acquisition of Adroit. Other off-balance sheet items are
composed of standard industry credit instruments (guarantees, standby letters
of credit and commitments to extend credit), and the non-consolidated variable
interest entity. CWB does not utilize, nor does it have exposure to,
collateralized debt obligations or credit default swaps. For additional
information regarding other off-balance sheet items refer to Notes 14 and 20
to the audited consolidated financial statements on pages 76 and 80
respectively in the Bank's 2008 Annual Report.
Capital Management
At April 30, 2009, CWB's total capital adequacy ratio, which measures
regulatory capital as a percentage of risk-weighted assets, was 15.2%, up from
13.0% last quarter and 14.0% a year earlier. The Tier 1 ratio at quarter end
was 11.0%, compared to 8.7% last quarter and 9.3% at the same time last year.
Compared to one year ago, CWB's total regulatory capital increased with the
issuance of $209.8 million preferred units, the retention of earnings, net of
dividends, and a higher general allowance for credit losses, slightly offset
by strong asset growth and a $15.0 million redemption of subordinated
debentures. The higher Tier 1 ratio compared to the prior quarter and same
time last year mainly reflects the issuance of $209.8 million preferred units.
During the second quarter, the Bank issued 2,990,000 Preferred Units (the
"Public Offering Preferred Units") for total proceeds of $74.8 million. The
Public Offering Preferred Units each consist of one Non-Cumulative 5-Year Rate
Reset Preferred Share, Series 3 (the "Series 3 Preferred Shares") in the
capital of the Bank with an issue price of $25.00 per share and 1.78 common
share purchase warrants (each whole warrant a "Warrant"). Each Warrant is
exercisable at a price of $14.00 to purchase one common share in the capital
of the Bank until March 3, 2014. The Bank also issued 5,400,000 Preferred
Units (the "Private Placement Preferred Units") by way of a private placement
to institutional investors for total proceeds of $135 million. The Private
Placement Preferred Units consist of one Series 3 Preferred Share and 1.7857
Warrants. The Warrants have the same terms as those issued under the public
offering.
Based on a $25.00 issue price, the Series 3 Preferred Shares yield 7.25%
annually, payable quarterly, as and when declared by the Board of Directors of
CWB for an initial period ending April 30, 2014. Thereafter, the dividend rate
will reset every five years at a level of 500 basis points over the then
current five-year Government of Canada bond yield. Holders of Series 3
Preferred Shares will, subject to certain conditions, have the option to
convert their shares to Non-Cumulative Floating Rate Preferred Shares, Series
4 (the "Series 4 Preferred Shares") on April 30, 2014 and on April 30 every
five years thereafter. Holders of the Series 4 Preferred Shares will be
entitled to a floating quarterly dividend rate equal to the then current
90-day Canadian Treasury Bill Rate plus 500 basis points, as and when declared
by the Board of Directors of CWB. The Series 3 Preferred Shares and Series 4
Preferred Shares are redeemable at the option of CWB on April 30, 2014, and
every fifth anniversary thereafter at a price of $25.00 per share. In
addition, the Series 4 Preferred Shares are redeemable at the option of CWB at
any other time, on or after April 30, 2014, at a price of $25.50 per share.
The Preferred Shares Series 3 and the Preferred Shares Series 4 qualify
as Tier 1 capital for the Bank. Both the Series 3 Preferred Shares and the
Warrants commenced trading on the Toronto Stock Exchange on March 2, 2009
under the trading symbols CWB.PR.A and CWB.WT, respectively. As at April 30,
2009, the closing market price of the Series 3 Preferred Shares and Warrants
was $25.50 and $4.20, respectively.
Further information relating to the Bank's capital position is provided
in Note 15 to the quarterly financial statements as well as the audited
consolidated financial statements and MD&A for the year ended October 31,
2008.
Book value per common share at April 30, 2009 was $11.42 compared to
$11.10 last quarter and $10.22 one year ago.
Common shareholders received a quarterly cash dividend of $0.11 per
common share on April 2, 2009. On June 3, 2009, the Board of Directors
declared a quarterly cash dividend of $0.11 per common share payable on July
2, 2009 to shareholders of record on June 18, 2009. The Board of Directors
also declared a cash dividend of $0.453125 per Series 3 Preferred Share
payable on July 31, 2009 to shareholders of record on July 23, 2009.
Changes in Accounting Policies
Goodwill and Intangible Assets
Effective November 1, 2008, the Bank adopted the CICA new accounting
standard, Section 3064, Goodwill and Intangible Assets. Section 3064, which
replaces Section 3062, Goodwill and Other Intangible Assets, and Section 3450,
Research and Development Costs, provides clarifying guidance on the criteria
that must be satisfied in order for an intangible asset to be recognized,
including internally developed intangible assets. The new guidance did not
have a material effect on the financial position or earnings of the Bank.
Credit Risk and Fair Value
Effective November 1, 2008, the Bank adopted EIC 173, Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities. The abstract
clarifies how the Bank's own credit risk and the credit risk of the
counterparty should be taken into account in determining the fair value of
financial assets and financial liabilities, including derivatives. The new
guidance did not have a material effect on the financial position or earnings
of the Bank.
Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable entities
to International Financial Reporting Standards (IFRS). The Bank's consolidated
financial statements will be prepared in accordance with IFRS for the fiscal
year commencing November 1, 2011 and will include comparative information for
the prior year.
The Bank has embarked on a four stage project to identify and evaluate
the impact of the transition to IFRS on the consolidated financial statements
and develop a plan to complete the transition. The project plan includes the
following phases - diagnostic, design and planning, solution development, and
implementation. The diagnostic phase is complete and the design and planning
phase is underway and expected to be completed by the end of fiscal 2009.
The impact of the transition to IFRS on the Bank's consolidated financial
statements is not yet determinable. Additional information regarding the
Bank's plan and the expected impact of the transition will be provided as the
project moves forward.
Controls and Procedures
There were no changes in the Bank's internal controls over financial
reporting that occurred during the quarter ended April 30, 2009 that have
materially affected, or are reasonably likely to materially affect, internal
controls over financial reporting.
With the recent acquisition of Adroit, the Bank's certifying officers
have limited the scope of design of disclosure controls and procedures and
internal control over financial reporting to exclude Adroit controls, policies
and procedures. With the work in the final stages, it is expected that the
limitation will be removed for the next quarter.
Prior to its release, this quarterly report to shareholders was reviewed
by the Audit Committee and, on the Audit Committee's recommendation, approved
by the Board of Directors of Canadian Western Bank, consistent with prior
quarters.
Updated Common Share Information
As at May 29, 2009, there were 63,621,040 common shares outstanding and
employee stock options, which are or will be exercisable for up to 4,444,255
common shares for maximum proceeds of $ 80.2 million. Also outstanding were
14,964,980 warrants that are each exercisable at a price of $14.00 to purchase
one common share in the Bank until March 3, 2014.
Summary of Quarterly Financial Information
2009 2008
----------------- -----------------------------------
($ thousands) Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Total revenues
(teb) $75,382 $76,947 $74,059 $76,375 $73,754 $74,669
Total revenues 73,707 75,361 72,519 74,933 72,402 73,332
Net income 21,580 25,619 24,485 26,327 25,302 25,905
Earnings per
common share
Basic 0.30 0.40 0.39 0.42 0.40 0.41
Diluted 0.30 0.40 0.38 0.41 0.39 0.40
Total assets
($ millions) 11,450 10,907 10,601 10,057 10,038 9,865
-------------------------------------------------------------------------
2007
-----------------
($ thousands) Q4 Q3
-------------------------------------
Total revenues
(teb) $74,359 $70,665
Total revenues 72,863 69,242
Net income 29,572 24,033
Earnings per
common share
Basic 0.47 0.39
Diluted 0.46 0.37
Total assets
($ millions) 9,525 8,881
-------------------------------------
The financial results for each of the last eight quarters are summarized
above. In general, CWB's performance reflects a relatively consistent trend
although the second quarter contains three fewer revenue earning days, or two
fewer days in a leap year such as 2008.
The Bank's quarterly financial results are subject to some fluctuation
due to its exposure to property and casualty insurance. Insurance operations,
which are primarily reflected in other income (refer to Results by Business
Segment - Insurance), are subject to seasonal weather conditions, cyclical
patterns of the industry and natural catastrophes. Mandatory participation in
the Alberta auto risk sharing pools can also result in unpredictable quarterly
fluctuations.
Quarterly results can also fluctuate due to the recognition of periodic
income tax items. Net income in the first quarter of 2008 included $1.0
million ($0.01 per diluted share) of tax expense resulting from the write-down
of future tax assets to reflect lower future federal corporate income tax
rates. Net income in the fourth quarter of 2007 included the recognition of
previously unrecorded tax benefits related to certain prior period
transactions of $2.9 million ($0.04 per diluted share).
For details on variations between the prior quarters see the summary of
quarterly results section of the Bank's MD&A for the year ended October 31,
2008 and the individual quarterly reports to shareholders which are available
on SEDAR at www.sedar.com and on CWB's website at www.cwbankgroup.com. The
2008 Annual Report and audited consolidated financial statements for the year
ended October 31, 2008 are available on both SEDAR and the Bank's website.
Results by Business Segment
CWB operates in two business segments: 1) banking and trust and 2)
insurance. Segmented information is also provided in Note 14 of the unaudited
interim consolidated financial statements.
Banking and trust
Operations of the banking and trust segment include commercial and retail
banking services, as well as personal and corporate trust services provided
through CWB's subsidiaries, Canadian Western Trust Company (CWT) and Valiant
Trust Company (Valiant). Effective November 1, 2008, the banking and trust
segment also includes wealth management services provided through CWB's 72.5%
ownership interest in subsidiary, Adroit Investment Management Ltd.
Second quarter net income of $19.4 million decreased 16% ($3.7 million)
compared to last year mainly reflecting the impact of a 35 basis point decline
in net interest margin (teb) to 1.91%, a 20% ($6.2 million) increase in
non-interest expenses and one less interest earning day this year. These
factors were partially offset by the positive earnings contribution from
strong 14% loan growth and $4.4 million higher gains on sale of securities.
The significant reduction in net interest margin (teb) compared to a year
earlier mainly resulted from consecutive reductions in the prime lending
interest rate and lower yields on securities, partially offset by lower
deposit costs, more favourable spreads on both new and renewal loans, and an
improved securities mix. Second quarter non-interest expenses included $1.7
million (before and after tax) of additional non-cash stock compensation
expense. The remainder of the increase in non-interest expenses mainly
resulted from continued business growth and investment in future development
initiatives, including the addition of Adroit. Credit related fee income was
down 19% ($1.3 million) while trust and wealth management services fee income
increased 31% ($0.9 million) mainly due to contributions from Adroit. Retail
services fee income, foreign exchange and other was up $0.2 million in the
aggregate. The quarterly efficiency ratio (teb), which measures non-interest
expense as a percentage of total revenues (teb), was 53.8%, compared to 45.7%
one year ago. The deterioration in the efficiency ratio (teb) reflects
constrained growth in net interest income attributed to a compressed net
interest margin (teb) and higher non-interest expenses, including the
additional non-cash stock compensation expense noted above, partially offset
by the positive impact of continued loan growth and a 30% ($4.2 million)
increase in other income.
Quarterly earnings were down 22% ($5.4 million) from the previous period
as positive loan growth was more than offset by a $3.5 million increase in
non-interest expenses, $2.1 million lower other income, three fewer days in
the second quarter and continued margin pressure. The quarterly efficiency
ratio (teb) deteriorated 760 basis points compared to last quarter. On a
year-to-date basis, net income was 7% ($3.3 million) lower than 2008 as strong
loan growth and a 35% ($10.0 million) increase in other income (largely
attributed to gains on sale of securities) was more than offset by a
significant 36 basis point drop in net interest margin and a 17% ($10.6
million) increase in non-interest expenses. The year-to-date efficiency ratio
(teb) of 49.9% deteriorated 600 basis points from the same time in 2008.
For the three months ended
-------------------------------------- Change from
April 30 January 31 April 30 April 30
($ thousands) 2009 2009 2008 2008
-------------------------------------------------------------------------
Net interest
income (teb) $ 51,399 $ 53,101 $ 54,325 (5)%
Other income 18,125 20,218 13,948 30
-------------------------------------------------------------------------
Total revenues (teb) 69,524 73,319 68,273 2
Provision for credit
losses 3,369 3,369 2,962 14
Non-interest expenses 37,381 33,910 31,207 20
Provision for income
taxes (teb) 9,313 11,151 11,031 (16)
Non-controlling
interest in
subsidiary 56 67 - nm
-------------------------------------------------------------------------
Net income $ 19,405 $ 24,822 $ 23,073 (16)%
-------------------------------------------------------------------------
Efficiency
ratio (teb) 53.8% 46.2% 45.7% 810 bp
Efficiency ratio 55.0 47.2 46.6 840
Net interest
margin (teb) 1.91 1.97 2.26 (35)
Net interest margin 1.86 1.91 2.21 (35)
Average loans
(millions)(1) $ 8,982 $ 8,855 $ 7,798 15%
Average assets
(millions)(1) 11,024 10,711 9,730 13
-------------------------------------------------------------------------
For the six months ended
------------------------- Change from
April 30 April 30 April 30
($ thousands) 2009 2008 2008
------------------------------------------------------------
Net interest
income (teb) $ 104,500 $ 109,967 (5)%
Other income 38,343 28,343 35
------------------------------------------------------------
Total revenues (teb) 142,843 138,310 3
Provision for credit
losses 6,738 5,775 17
Non-interest expenses 71,291 60,711 17
Provision for income
taxes (teb) 20,464 24,311 (16)
Non-controlling
interest in
subsidiary 123 - nm
------------------------------------------------------------
Net income $ 44,227 $ 47,513 (7)%
------------------------------------------------------------
Efficiency
ratio (teb) 49.9% 43.9% 600 bp
Efficiency ratio 51.0 44.7 630
Net interest
margin (teb) 1.94 2.30 (36)
Net interest margin 1.88 2.25 (37)
Average loans
(millions)(1) $ 8,918 $ 7,672 16%
Average assets
(millions)(1) 10,867 9,579 13
------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following Financial
Highlights table.
nm - not meaningful.
(1) Assets are disclosed on an average daily balance basis.
Insurance
The insurance segment is comprised of the operations of CWB's subsidiary,
Canadian Direct Insurance Incorporated (Canadian Direct or CDI), which
provides auto and home insurance to individuals in BC and Alberta.
Canadian Direct reported second quarter net income of $2.2 million. This
represented a 2% ($0.1 million) decrease compared to the same quarter last
year reflecting higher claims experience in the BC home product line. Two
large fire claims and some adverse development from weather related claims in
the first quarter resulted in a 78% loss ratio for this line of business,
compared to 57% a year earlier. Net earned premiums grew 5% ($1.1 million)
reflecting growth in policies outstanding and a higher average premium per
policy sold in all lines of business except BC auto. Canadian Direct's share
of the Alberta auto risk sharing pools (the Pools) had minimal impact on net
income before tax, both this quarter and in the same quarter last year.
In comparison to the previous quarter, Canadian Direct's net income
increased 173% ($1.4 million) primarily due to improvement in the loss ratios
for the BC home and BC auto lines of business. The BC home loss ratio, which
was materially impacted by severe weather related events in the first quarter,
dropped from 109% to 78%. The BC auto loss ratio improved from 62% to 48% due
to positive development on existing liability claims. Canadian Direct also
benefited from improvements of $0.2 million in both gains on the sale of
securities and before tax earnings attributed to its share of the Pools.
Offsetting these positive results was a 1% ($0.3 million) decline in net
earned premiums due to three fewer days in the quarter.
Year-to-date net income of $3.0 million represented a 20% ($0.7 million)
decline compared to the same period last year as growth in net earned premiums
($2.1 million) was more than offset by higher net claims expense ($2.6
million). Gains on the sale of securities were $0.2 million higher than last
year, offset by a comparable decline in before tax earnings contributions from
the Pools. Barring any further severe weather or other catastrophe type
events, the combination of expected improved claims experience and a higher
volume of policy sales in the remaining months of fiscal 2009 due to both
seasonal factors and ongoing business growth should support improved results
through the second half of the year.
For the three months ended
-------------------------------------- Change from
April 30 January 31 April 30 April 30
($ thousands) 2009 2009 2008 2008
-------------------------------------------------------------------------
Net interest
income (teb) $ 1,413 $ 1,495 $ 1,334 6%
-------------------------------------------------------------------------
Other income (net)
Net earned premiums 24,880 25,215 23,737 5
Commissions and
processing fees 760 654 738 3
Net claims and
adjustment expenses (16,126) (18,651) (15,135) 7
Policy acquisition
costs (5,316) (5,106) (5,212) 2
-------------------------------------------------------------------------
Insurance
revenue (net) 4,198 2,112 4,128 2
Gains on sale of
securities 247 21 19 nm
-------------------------------------------------------------------------
Total revenues
(net) (teb) 5,858 3,628 5,481 7
Non-interest expenses 2,613 2,495 2,246 16
Provision for income
taxes (teb) 1,070 336 1,006 6
-------------------------------------------------------------------------
Net income $ 2,175 $ 797 $ 2,229 (2)%
-------------------------------------------------------------------------
Policies
outstanding (No.) 170,433 168,642 166,093 3
Gross written
premiums $ 29,120 $ 23,103 $ 26,642 9
Claims loss ratio(1) 65% 74% 64% 100 bp
Expense ratio(2) 29 28 28 100
Combined ratio(3) 94 102 92 200
Alberta auto risk
sharing pools impact
on net income
before tax $ 31 $ (158) $ (3) nm%
Average total assets
(millions) 192 18 180 6
-------------------------------------------------------------------------
For the six months ended
------------------------- Change from
April 30 April 30 April 30
($ thousands) 2009 2008 2008
------------------------------------------------------------
Net interest
income (teb) $ 2,908 $ 2,738 6%
------------------------------------------------------------
Other income (net)
Net earned premiums 50,095 48,036 4
Commissions and
processing fees 1,414 1,400 1
Net claims and
adjustment expenses (34,777) (32,204) 8
Policy acquisition
costs (10,422) (9,895) 5
------------------------------------------------------------
Insurance
revenue (net) 6,310 7,337 (14)
Gains on sale of
securities 268 38 nm
------------------------------------------------------------
Total revenues
(net) (teb) 9,486 10,113 (6)
Non-interest expenses 5,108 4,566 12
Provision for income
taxes (teb) 1,406 1,853 (24)
------------------------------------------------------------
Net income $ 2,972 $ 3,694 (20)%
------------------------------------------------------------
Policies
outstanding (No.) 170,433 166,093 3
Gross written
premiums $ 52,223 $ 48,258 8
Claims loss ratio(1) 69% 67% 200 bp
Expense ratio(2) 29 27 200
Combined ratio(3) 98 94 400
Alberta auto risk
sharing pools impact
on net income
before tax $ (127) $ 117 nm%
Average total assets
(millions) 190 180 6
------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following Financial
Highlights table.
nm - not meaningful.
(1) Net claims and adjustment expenses as a percentage of net earned
premiums.
(2) Policy acquisition costs and non-interest expenses net of commissions
and processing fees as a percentage of net earned premiums.
(3) Sum of the claims loss and expense ratios.
Fiscal 2009 Target Ranges and Performance
The performance target ranges established for the 2009 fiscal year are
presented in the table below together with CWB's actual performance to date.
------------------------------
2009
Target 2009
Ranges Performance(1)
-------------------------------------------------------------------------
Net income growth(2) 2% to 5% (8)%
-------------------------------------------------------------------------
Total revenue (teb) growth 5% to 8% 3%
-------------------------------------------------------------------------
Loan growth 10% 14%
-------------------------------------------------------------------------
Provision for credit losses as a
percentage of average loans 0.15% - 0.18% 0.15%
-------------------------------------------------------------------------
Efficiency ratio (teb) 46% - 49% 50.2%
-------------------------------------------------------------------------
Return on common equity 14% - 16% 12.9%(3)
-------------------------------------------------------------------------
Return on assets 0.90% - 1.05% 0.82%(4)
-------------------------------------------------------------------------
(1) 2009 performance for earnings and revenue growth is the current year
results over the same period in the prior year, loan growth is the
increase over the past twelve months and performance for ratio
targets is the current year-to-date results annualized.
(2) Net income, before preferred share dividends.
(3) Return on common equity calculated as annualized year-to-date net
income after preferred share dividends divided by average common
shareholders' equity.
(4) Return on assets calculated as annualized year-to-date net income
after preferred share dividends divided by average total assets.
The adverse impact of a compressed net interest margin coupled with
Western Canada's ongoing recessionary environment has been more pronounced
than anticipated when the Bank initially established its fiscal 2009
performance target ranges. The year-to-date drop in the prime lending interest
rate of 175 basis points to reach an historic low of 2.25% was much greater
than expected and has significantly affected both total revenues and overall
profitability. While realized gains on the sale of securities have helped
alleviate the full financial impact of margin pressures, this does not
represent a sustainable source of income over the long-term. Also, the
performance impact from the recently completed preferred share offerings was
not applicable when the above targets were established at the end of fiscal
2008. In view of the foregoing, it is unlikely the Bank will achieve its
fiscal 2009 performance targets related to profitability. Reflecting slower
economic activity and anticipated loan repayments, particularly for interim
construction accounts, CWB will also be challenged to meet its 10% loan growth
target. Management believes the targeted provisions for credit losses should
be sufficient in consideration of current credit quality. An improved net
interest margin should have a positive influence on total revenues going
forward, while controls on discretionary spending will likely support modest
improvements for the efficiency ratio (teb).
Interest rates appear to have bottomed, market spreads are returning to
more normal historic levels and deposit costs have eased. These factors
combined with the CWB's success in establishing interest rate floors on
floating rate loans and more favourable pricing on new and renewal lending
accounts are all positive indicators for net interest margin going forward, as
was evident in the latter part of the second quarter. Net interest margin is
expected to return to more normal historic levels over time. Effective
execution of strategies to prudently leverage capital from the preferred share
units should also become accretive to earnings over time. Despite an
expectation for ongoing challenges through the remainder of 2009, management
is very optimistic about the Bank's overall financial strength and flexibility
to manage through the current cycle. The medium-term outlook is positive and
CWB is well positioned to build on its long-history of strong financial
performance and growth.
This management's discussion and analysis is dated June 4, 2009.
Taxable Equivalent Basis (teb)
Most financial institutions analyze revenue on a taxable equivalent basis
to permit uniform measurement and comparison of net interest income. Net
interest income (as presented in the consolidated statement of income)
includes tax-exempt income on certain securities. Since this income is not
taxable, the rate of interest or dividends received is significantly lower
than would apply to a loan or security of the same amount. The adjustment to
taxable equivalent basis increases interest income and the provision for
income taxes to what they would have been had the tax-exempt securities been
taxed at the statutory rate.
Non-GAAP Measures
Taxable equivalent basis, return on common shareholders' equity, return
on assets, efficiency ratio, net interest margin, provisions for credit losses
as a percentage of average loans, 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 divided by average total assets;
- efficiency ratio - non-interest expenses divided by total revenues
(net interest income plus other income);
- net interest margin - net interest income divided by average total
assets;
- tangible common equity to risk-weighted assets - shareholders' equity
less subsidiary goodwill divided by risk-weighted assets, calculated
in accordance with guidelines issued by the Office of the
Superintendent of Financial Institutions Canada (OSFI);
- Tier 1 and total capital adequacy ratios - in accordance with
guidelines issued by OSFI;
- average balances - average daily balances;
- claims loss ratio - net insurance claims and adjustment expenses as a
percentage of net earned premiums;
- expense ratio - policy acquisition costs and non-interest expenses
net of commissions and processing fees as a percentage of net earned
premiums; and
- combined ratio - sum of the claims loss and expense ratios.
Forward-looking Statements
From time to time, Canadian Western Bank (the Bank) makes written and
verbal forward-looking statements. Statements of this type are included in the
Annual Report and reports to shareholders and may be included in filings with
Canadian securities regulators or in other communications such as press
releases and corporate presentations. Forward-looking statements include, but
are not limited to, statements about the Bank's objectives and strategies,
targeted and expected financial results and the outlook for the Bank's
businesses or for the Canadian economy. Forward-looking statements are
typically identified by the words "believe", "expect", "anticipate", "intend",
"estimate", "may increase", "may impact" and other similar expressions, or
future or conditional verbs such as "will", "should", "would" and "could".
By their very nature, forward-looking statements involve numerous
assumptions. A variety of factors, many of which are beyond the Bank's
control, may cause actual results to differ materially from the expectations
expressed in the forward-looking statements. These factors include, but are
not limited to, general business and economic conditions in Canada including
the volatility and lack of liquidity in financial markets, fluctuations in
interest rates and currency values, changes in monetary policy, changes in
economic and political conditions, regulatory and legal developments, the
level of competition in the Bank's markets, the occurrence of weather-related
and other natural catastrophes, changes in accounting standards and policies,
the accuracy of and completeness of information the Bank receives about
customers and counterparties, the ability to attract and retain key personnel,
the ability to complete and integrate acquisitions, reliance on third parties
to provide components of the Bank's business infrastructure, changes in tax
laws, technological developments, unexpected changes in consumer spending and
saving habits, timely development and introduction of new products, and
management's ability to anticipate and manage the risks associated with these
factors. It is important to note that the preceding list is not exhaustive of
possible factors.
These and other factors should be considered carefully and readers are
cautioned not to place undue reliance on these forward-looking statements as a
number of important factors could cause the Bank's actual results to differ
materially from the expectations expressed in such forward looking statements.
Unless required by securities law, the Bank does not undertake to update any
forward-looking statement, whether written or verbal, that may be made from
time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy in 2009 and how
it will affect CWB's businesses are material factors the Bank considers when
setting its objectives. In setting performance target ranges for fiscal 2009,
management's expectations assumed prolonged economic uncertainty that included
significantly challenged global economies and troubled markets; moderated
economic activity in Western Canada; a declining interest rate environment
supported by stable inflation partially attributed to lower energy and
commodity prices; sound credit quality with actual losses remaining within the
Bank's historic range of acceptable levels; and, a compressed net interest
margin consistent with elevated deposit costs, reduced prime lending rates,
comparatively lower investment returns reflecting high quality assets held in
the securities portfolio and the Bank's higher liquidity levels maintained in
response to disruptions in financial markets, partially offset by expectations
for higher credit spreads and a corresponding increase in loan yields on both
new lending facilities and renewal accounts. As at April 30, 2009, interest
rates had fallen much more than management anticipated at the onset of fiscal
2009 and there was also a confirmed recessionary environment in Western
Canada.
-------------------------------------------------------------------------
Consolidated Statements of Income
-------------------------------------------------------------------------
For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except April 30 January 31 April 30 April 30
per share amounts) 2009 2009 2008 2008
-------------------------------------------------------------------------
Interest Income
Loans $ 107,828 $ 119,268 $ 121,593 (11)%
Securities 10,462 11,212 13,862 (25)
Deposits with
regulated financial
institutions 3,770 3,537 4,543 (17)
-------------------------------------------------------------------------
122,060 134,017 139,998 (13)
-------------------------------------------------------------------------
Interest Expense
Deposits 65,824 75,740 80,325 (18)
Subordinated
debentures 5,099 5,267 5,366 (5)
-------------------------------------------------------------------------
70,923 81,007 85,691 (17)
-------------------------------------------------------------------------
Net Interest Income 51,137 53,010 54,307 (6)
Provision for Credit
Losses (Note 6) 3,369 3,369 2,962 14
-------------------------------------------------------------------------
Net Interest Income
after Provision for
Credit Losses 47,768 49,641 51,345 (7)
-------------------------------------------------------------------------
Other Income
Credit related 5,321 5,743 6,587 (19)
Insurance, net
(Note 3) 4,198 2,112 4,128 2
Trust and wealth
management services 3,869 3,913 2,952 31
Retail services 1,913 1,844 1,861 3
Gains on sale of
securities 6,580 8,143 1,998 229
Foreign exchange
gains 667 555 435 53
Other 22 41 134 (84)
-------------------------------------------------------------------------
22,570 22,351 18,095 25
-------------------------------------------------------------------------
Net Interest and
Other Income 70,338 71,992 69,440 1
-------------------------------------------------------------------------
Non-Interest Expenses
Salaries and
employee benefits 26,587 23,837 21,674 23
Premises and
equipment 6,528 6,028 5,503 19
Other expenses 6,330 6,149 5,847 8
Provincial
capital taxes 549 391 429 28
-------------------------------------------------------------------------
39,994 36,405 33,453 20
-------------------------------------------------------------------------
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 30,344 35,587 35,987 (16)
Income Taxes 8,708 9,901 10,685 (19)
-------------------------------------------------------------------------
21,636 25,686 25,302 (14)
Non-Controlling
Interest in
Subsidiary 56 67 - nm
-------------------------------------------------------------------------
Net Income $ 21,580 $ 25,619 $ 25,302 (15)%
-------------------------------------------------------------------------
Preferred share
dividends (Note 9) $ 2,458 $ - $ - nm%
Net income available
to common
shareholders $ 19,122 $ 25,619 $ 25,302 (24)
-------------------------------------------------------------------------
Average number of
common shares
(in thousands) 63,503 63,465 63,183 1
Average number of
diluted common shares
(in thousands) 63,559 63,667 64,472 (1)
-------------------------------------------------------------------------
Earnings Per Share
Basic $ 0.30 $ 0.40 $ 0.40 (25)
Diluted $ 0.30 $ 0.40 $ 0.39 (23)
-------------------------------------------------------------------------
For the six months ended
(unaudited) ------------------------- Change from
($ thousands, except April 30 April 30 April 30
per share amounts) 2009 2008 2008
------------------------------------------------------------
Interest Income
Loans $ 227,096 $ 248,344 (9)%
Securities 21,674 29,053 (25)
Deposits with
regulated financial
institutions 7,307 9,500 (23)
------------------------------------------------------------
256,077 286,897 (11)
------------------------------------------------------------
Interest Expense
Deposits 141,564 166,032 (15)
Subordinated
debentures 10,366 10,849 (4)
------------------------------------------------------------
151,930 176,881 (14)
------------------------------------------------------------
Net Interest Income 104,147 110,016 (5)
Provision for Credit
Losses (Note 6) 6,738 5,775 17
------------------------------------------------------------
Net Interest Income
after Provision for
Credit Losses 97,409 104,241 (7)
------------------------------------------------------------
Other Income
Credit related 11,064 13,896 (20)
Insurance, net
(Note 3) 6,310 7,337 (14)
Trust and wealth
management services 7,782 6,516 19
Retail services 3,757 3,820 (2)
Gains on sale of
securities 14,723 3,012 389
Foreign exchange
gains 1,222 818 49
Other 63 319 (80)
------------------------------------------------------------
44,921 35,718 26
------------------------------------------------------------
Net Interest and
Other Income 142,330 139,959 2
------------------------------------------------------------
Non-Interest Expenses
Salaries and
employee benefits 50,424 42,291 19
Premises and
equipment 12,556 10,885 15
Other expenses 12,479 11,103 12
Provincial
capital taxes 940 998 (6)
------------------------------------------------------------
76,399 65,277 17
------------------------------------------------------------
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 65,931 74,682 (12)
Income Taxes 18,609 23,475 (21)
------------------------------------------------------------
47,322 51,207 (8)
Non-Controlling
Interest in
Subsidiary 123 - nm
------------------------------------------------------------
Net Income $ 47,199 $ 51,207 (8)%
------------------------------------------------------------
Preferred share
dividends (Note 9) $ 2,458 $ - nm%
Net income available
to common
shareholders $ 44,741 $ 51,207 (13)
------------------------------------------------------------
Average number of
common shares
(in thousands) 63,484 63,078 1
Average number of
diluted common shares
(in thousands) 63,609 64,583 (2)
------------------------------------------------------------
Earnings Per Share
Basic $ 0.70 $ 0.81 (14)
Diluted $ 0.70 $ 0.79 (11)
------------------------------------------------------------
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Balance Sheets
-------------------------------------------------------------------------
Change
As at As at As at As at from
(unaudited) April 30 January 31 October 31 April 30 April 30
($ thousands) 2009 2009 2008 2008 2008
-------------------------------------------------------------------------
Assets
Cash Resources
Cash and
non-
interest
bearing
deposits
with
financial
institu-
tions $ 14,739 $ 31,984 $ 8,988 $ 31,039 (53)%
Interest
bearing
deposits
with
regulated
financial
institu-
tions
(Note 4) 557,313 430,594 464,193 476,585 17
Cheques and
other items
in transit - 7,461 18,992 6,065 (100)
-------------------------------------------------------------------------
572,052 470,039 492,173 513,689 11
-------------------------------------------------------------------------
Securities
(Note 4)
Issued or
guaranteed
by Canada 585,320 338,844 347,777 331,272 77
Issued or
guaranteed
by a
province or
municipality 545,032 455,759 452,045 443,775 23
Other
securities 519,283 444,166 429,142 490,945 6
-------------------------------------------------------------------------
1,649,635 1,238,769 1,228,964 1,265,992 30
-------------------------------------------------------------------------
Securities
Purchased
Under Resale
Agreements - 15,000 77,000 155,148 (100)
-------------------------------------------------------------------------
Loans (Notes 5
and 7)
Residential
mortgages 2,239,023 2,233,841 2,134,327 1,959,048 14
Other loans 6,877,594 6,834,088 6,565,280 6,050,679 14
-------------------------------------------------------------------------
9,116,617 9,067,929 8,699,607 8,009,727 14
Allowance
for credit
losses
(Note 6) (75,099) (74,476) (75,538) (67,091) 12
-------------------------------------------------------------------------
9,041,518 8,993,453 8,624,069 7,942,636 14
-------------------------------------------------------------------------
Other
Land,
buildings
and
equipment 30,369 31,195 31,893 25,795 18
Goodwill 9,360 9,360 6,933 6,933 35
Other
intangible
assets 7,089 7,412 2,155 2,410 194
Insurance
related 52,283 52,011 52,943 52,656 (1)
Derivative
related
(Note 8) 4,524 12,852 9,980 3,966 14
Other
assets 83,795 76,981 74,622 68,989 21
-------------------------------------------------------------------------
187,420 189,811 178,526 160,749 17
-------------------------------------------------------------------------
Total
Assets $11,450,625 $10,907,072 $10,600,732 $10,038,214 14 %
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits
Payable on
demand $ 360,989 $ 362,394 $ 383,083 $ 373,692 (3)%
Payable
after
notice 2,139,361 1,982,001 2,010,039 2,123,327 1
Payable on
a fixed
date 7,107,984 7,073,702 6,747,597 6,077,005 17
Deposit from
Canadian
Western
Bank
Capital
Trust 105,000 105,000 105,000 105,000 -
-------------------------------------------------------------------------
9,713,334 9,523,097 9,245,719 8,679,024 12
-------------------------------------------------------------------------
Other
Cheques and
other items
in transit 44,039 30,432 29,036 34,550 27
Insurance
related 135,563 135,565 134,769 127,337 6
Derivative
related
(Note 8) 852 97 163 846 1
Securities
purchased
under
reverse
resale
agreements 83,468 - - 19,896 320
Other
liabilities 162,616 138,278 136,897 140,346 16
-------------------------------------------------------------------------
426,538 304,372 300,865 322,975 32
-------------------------------------------------------------------------
Subordinated
Debentures
Conventional 375,000 375,000 375,000 390,000 (4)
-------------------------------------------------------------------------
Shareholders'
Equity
Preferred
shares
(Note 9) 209,750 - - - nm
Common
shares
(Note 9) 223,062 222,010 221,914 220,634 1
Contributed
surplus 18,060 15,759 14,234 11,655 55
Retained
earnings 474,353 466,841 448,203 411,329 15
Accumulated
other
comprehensive
income (loss) 10,528 (7) (5,203) 2,597 305
-------------------------------------------------------------------------
935,753 704,603 679,148 646,215 45
-------------------------------------------------------------------------
Total
Liabilities
and Share-
holders'
Equity $11,450,625 $10,907,072 $10,600,732 $10,038,214 14 %
-------------------------------------------------------------------------
Contingent
Liabilities
and
Commitments
(Note 11)
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
-------------------------------------------------------------------------
For the six months ended
-------------------------
(unaudited) April 30 April 30
($ thousands) 2009 2008
-------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $ 448,203 $ 372,739
Net income 47,199 51,207
Dividends - Preferred shares (2,458) -
- Common shares (13,965) (12,617)
Issuance costs on preferred units (4,626) -
-------------------------------------------------------------------------
Balance at end of period 474,353 411,329
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period (5,203) (5,931)
Other comprehensive income 15,731 8,523
-------------------------------------------------------------------------
Balance at end of period 10,528 2,597
-------------------------------------------------------------------------
Total retained earnings and accumulated
other comprehensive income (loss) 484,881 413,926
-------------------------------------------------------------------------
Preferred Shares (Note 9)
Balance at beginning of period - -
Issued during the period 209,750 -
-------------------------------------------------------------------------
Balance at end of period 209,750 -
-------------------------------------------------------------------------
Common Shares (Note 9)
Balance at beginning of period 221,914 219,004
Issued on exercise of employee stock options 393 900
Transferred from contributed surplus on
exercise or exchange of options 755 730
-------------------------------------------------------------------------
Balance at end of period 223,062 220,634
-------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 14,234 9,681
Amortization of fair value of employee
stock options 4,581 2,704
Transferred to common shares on exercise
or exchange of options (755) (730)
-------------------------------------------------------------------------
Balance at end of period 18,060 11,655
-------------------------------------------------------------------------
Total Shareholders' Equity $ 935,753 $ 646,215
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
-------------------------------------------------------------------------
For the three months For the six months
ended ended
------------------------- -------------------------
(unaudited) April 30 April 30 April 30 April 30
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net Income $ 21,580 $ 25,302 $ 47,199 $ 51,207
-------------------------------------------------------------------------
Other Comprehensive
Income, net of tax
Available-for-sale
securities:
Gains from change
in fair value(1) 21,528 2,573 30,549 8,429
Reclassification
to other income(2) (4,630) (1,349) (10,380) (2,034)
-------------------------------------------------------------------------
16,898 1,224 20,169 6,395
-------------------------------------------------------------------------
Derivatives designated
as cash flow hedges:
Gains from change
in fair value(3) 2,532 1,529 5,968 3,338
Reclassification
to net interest
income(4) (3,485) (179) (4,996) (267)
Reclassification to
other liabilities
for derivatives
terminated prior
to maturity(5) (5,410) (938) (5,410) (938)
-------------------------------------------------------------------------
(6,363) 412 (4,438) 2,133
-------------------------------------------------------------------------
10,535 1,636 15,731 8,528
-------------------------------------------------------------------------
Comprehensive Income
for the Period $ 32,115 $ 26,938 $ 62,930 $ 59,735
-------------------------------------------------------------------------
(1) Net of income tax expense of $9,027 and $12,780 for the three and six
months ended April 30, 2009, respectively (2008 - $1,237 and $4,053).
(2) Net of income tax benefit of $1,950 and $4,343 for the three and six
months ended April 30, 2009, respectively (2008 - $649 and $978).
(3) Net of income tax expense of $948 and $2,497 for the three and six
months ended April 30, 2009, respectively (2008 - $695 and $1,528).
(4) Net of income tax benefit of $1,409 and $2,090 for the three and six
months ended April 30, 2009, respectively (2008 - $82 and $123).
(5) Net of income tax benefit of $2,264 and $2,264 for the three and six
months ended April 30, 2009, respectively (2008 - $429 and $429).
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Cash Flow
-------------------------------------------------------------------------
For the three months For the six months
ended ended
------------------------- -------------------------
(unaudited) April 30 April 30 April 30 April 30
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash Flows from
Operating Activities
Net income $ 21,580 $ 25,302 $ 47,199 $ 51,207
Adjustments to
determine net cash
flows
Provision for
credit losses 3,369 2,962 6,738 5,775
Depreciation and
amortization 2,159 1,686 4,285 3,355
Amortization of
fair value of
employee stock
options 3,020 1,376 4,581 2,704
Future income
taxes, net (2,687) (199) (4,312) 527
Gain on sale of
securities, net (6,580) (1,998) (14,723) (3,012)
Accrued interest
receivable and
payable, net 3,261 (2,215) 15,061 9,600
Current income
taxes payable, net 1,931 (83) (2,047) (1,884)
Other items, net 15,090 9,631 7,528 (9,050)
-------------------------------------------------------------------------
41,143 36,462 64,310 59,222
-------------------------------------------------------------------------
Cash Flows from
Financing Activities
Deposits, net 190,237 118,678 467,615 422,106
Common shares issued
(Note 9) 333 250 393 900
Preferred units
issued (Note 9) 209,750 - 209,750 -
Issuance costs on
preferred units (4,626) - (4,626) -
Dividends (9,442) (6,318) (16,423) (12,617)
-------------------------------------------------------------------------
386,252 112,610 656,709 410,389
-------------------------------------------------------------------------
Cash Flows from
Investing Activities
Interest bearing
deposits with
regulated financial
institutions, net (121,028) 174 (81,828) (68,545)
Securities, purchased (776,638) (845,860) (1,516,274) (1,398,868)
Securities, sale
proceeds 361,682 451,469 989,576 749,756
Securities, matured 24,252 425,223 131,578 739,510
Securities purchased
under resale
agreements, net 98,468 73,748 160,468 71,673
Loans, net (51,434) (238,617) (424,187) (542,831)
Land, buildings
and equipment (1,010) (1,553) (2,115) (3,143)
Business acquisitions
(Note 2) - - (6,481) -
-------------------------------------------------------------------------
(465,708) (135,416) (749,263) (452,448)
-------------------------------------------------------------------------
Change in Cash and
Cash Equivalents (38,313) 13,656 (28,244) 17,163
Cash and Cash
Equivalents at
Beginning of Period 9,013 (11,102) (1,056) (14,609)
-------------------------------------------------------------------------
Cash and Cash
Equivalents at End
of Period(*) $ (29,300) $ 2,554 $ (29,300) $ 2,554
-------------------------------------------------------------------------
(*) Represented by:
Cash and
non-interest
bearing deposits
with financial
institutions $ 14,739 $ 31,039 $ 14,739 $ 31,039
Cheques and other
items in transit
(included in
Cash Resources) - 6,065 - 6,065
Cheques and other
items in transit
(included in
Other Liabilities) (44,039) (34,550) (44,039) (34,550)
-------------------------------------------------------------------------
Cash and Cash
Equivalents at End
of Period $ (29,300) $ 2,554 $ (29,300) $ 2,554
-------------------------------------------------------------------------
Supplemental
Disclosure of Cash
Flow Information
Amount of interest
paid in the period $ 62,745 $ 85,779 $ 132,961 $ 166,443
Amount of income
taxes paid in the
period 9,464 13,865 24,968 24,832
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements
-------------------------------------------------------------------------
(unaudited)
($ thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
These unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles (GAAP), including the accounting requirements of the
Office of the Superintendent of Financial Institutions Canada (OSFI),
using the same accounting policies as the audited consolidated
financial statements for the year ended October 31, 2008. Under
Canadian GAAP, additional disclosures are required in annual
financial statements and accordingly, these unaudited interim
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements for the year ended
October 31, 2008 as set out on pages 61 to 91 of the Bank's 2008
Annual Report.
Changes in Accounting Policies
Goodwill and Intangible Assets
Effective November 1, 2008, the Bank adopted the CICA new accounting
standard, Section 3064, Goodwill and Intangible Assets. Section 3064,
which replaces Section 3062, Goodwill and Other Intangible Assets,
and Section 3450, Research and Development Costs, provides clarifying
guidance on the criteria that must be satisfied in order for an
intangible asset to be recognized, including internally developed
intangible assets. The new guidance did not have a material effect on
the financial position or earnings of the Bank.
Credit Risk and Fair Value
Effective November 1, 2008, the Bank adopted EIC 173, Credit Risk and
the Fair Value of Financial Assets and Financial Liabilities. The
abstract clarifies how the Bank's own credit risk and the credit risk
of a counterparty should be taken into account in determining the
fair value of financial assets and financial liabilities, including
derivatives. The new guidance did not have a material effect on the
financial position or earnings of the Bank.
2. Business Acquisition
Effective November 1, 2008 the Bank acquired 72.5% of the outstanding
shares of Adroit Investment Management Ltd. (Adroit). Adroit is an
Edmonton, Alberta based firm specializing in wealth management for
individuals, corporations and institutional clients. The results of
operations for Adroit have been included in the Bank's consolidated
financial statements since the effective acquisition date. The
initial $6,481 acquisition cost was paid in cash. Additional
contingent consideration, to a maximum of $1,675, will be paid in
cash if earnings targets are achieved over a two year period. Any
future contingent payment will be recorded when the liability has
been incurred and will increase goodwill.
The following table summarizes the fair value of the assets acquired
and liabilities assumed:
Net assets acquired
Other assets $ 90
Other intangible assets 3,964
Goodwill 2,427
---------------------------------------------------------------------
$ 6,481
---------------------------------------------------------------------
Other intangible assets include customer relationships, non-
competition agreements and a trade name. The trade name, which has an
estimated value of $280, is not subject to amortization. Adroit's
financial results, the goodwill and other intangible assets related
to the acquisition are included in the banking and trust segment. The
total amount of goodwill and intangible assets are not deductible for
income tax purposes.
3. Insurance Revenues, Net
Insurance revenues, net, as reported in other income on the
consolidated statement of income is presented net of net claims and
adjustment expenses and policy acquisition costs.
For the six months
For the three months ended ended
-------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
2009 2009 2008 2009 2008
---------------------------------------------------------------------
Net earned
premiums $ 24,880 $ 25,215 $ 23,737 $ 50,095 $ 48,036
Commissions
and processing
fees 760 654 738 1,414 1,400
Net claims and
adjustment
expenses (16,126) (18,651) (15,135) (34,777) (32,204)
Policy
acquisition
costs (5,316) (5,106) (5,212) (10,422) (9,895)
---------------------------------------------------------------------
Total, net $ 4,198 $ 2,112 $ 4,128 $ 6,310 $ 7,337
---------------------------------------------------------------------
4. Securities
Net unrealized gains (losses) reflected on the balance sheet follow:
As at As at As at
April 30 January 31 April 30
2009 2009 2008
---------------------------------------------------------------------
Interest bearing deposits with
regulated financial institutions $ 12,231 $ 6,540 $ 1,849
Securities
Issued or guaranteed by Canada 3,090 2,452 1,106
Issued or guaranteed by a
province or municipality 10,509 7,112 1,827
Other securities (15,039) (29,288) (4,600)
---------------------------------------------------------------------
Unrealized gain (losses), net $ 10,791 $ (13,184) $ 182
---------------------------------------------------------------------
The securities portfolio is primarily comprised of high quality debt
instruments and preferred shares that are not held for trading
purposes and, where applicable, are typically held until maturity.
Fluctuations in value are generally attributed to changes in market
credit spreads, interest rates and shifts in the interest rate curve.
Unrealized losses are considered to be other than permanent in
nature.
5. Loans
The composition of the Bank's loan portfolio by geographic region and
industry sector follow.
British Saskat-
($ millions) Columbia Alberta chewan Manitoba Other Total
-------------------------------------------------------------------------
Loans to
Individuals
Residential
mort-
gages(2) $ 1,149 $ 845 $ 117 $ 79 $ 49 $ 2,239
Other loans 118 215 25 4 1 363
-------------------------------------------------------------------------
1,267 1,060 142 83 50 2,602
-------------------------------------------------------------------------
Loans to
Businesses
Commercial 734 1,283 105 88 247 2,457
Construction
and real
estate(3) 958 1,414 89 59 178 2,698
Equipment
financing 300 813 42 12 52 1,219
Energy - 141 - - - 141
-------------------------------------------------------------------------
1,992 3,651 236 159 477 6,515
-------------------------------------------------------------------------
Total
Loans(1) $ 3,259 $ 4,711 $ 378 $ 242 $ 527 $ 9,117
-------------------------------------------------------------------------
Composition
Percentage
April 30,
2009 36% 52% 4% 2% 6% 100%
January 31,
2009 36% 52% 4% 2% 6% 100%
October 31,
2008 36% 53% 4% 2% 5% 100%
-------------------------------------------------------------------------
April January October
30 31 31
2009 2009 2008
Composi- Composi- Composi-
tion tion tion
Percent- Percent- Percent-
($ millions) age age age
-------------------------------------------
Loans to
Individuals
Residential
mort-
gages(2) 24% 24% 24%
Other loans 4 4 4
-------------------------------------------
28 28 28
-------------------------------------------
Loans to
Businesses
Commercial 27 27 27
Construction
and real
estate(3) 30 29 29
Equipment
financing 13 14 14
Energy 2 2 2
72 72 72
-------------------------------------------
Total
Loans(1) 100% 100% 100%
-------------------------------------------
Composition
Percentage
April 30,
2009
January 31,
2009
October 31,
2008
-------------------------------------------
(1) This table does not include an allocation for credit losses or
deferred revenue and premiums.
(2) Includes single- and multi-unit residential mortgages and project
(interim) mortgages on residential property.
(3) Includes commercial term mortgages and project (interim) mortgages
for non-residential property.
6. Allowance for Credit Losses
The following table shows the changes in the allowance for credit
losses.
For the three months ended
April 30, 2009
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 13,554 $ 60,922 $ 74,476
Provision for credit losses 3,276 93 3,369
Write-offs (2,759) - (2,759)
Recoveries 13 - 13
---------------------------------------------------------------------
Balance at end of period $ 14,084 $ 61,015 $ 75,099
---------------------------------------------------------------------
For the three months ended
January 31, 2009
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 15,011 $ 60,527 $ 75,538
Provision for credit losses 2,974 395 3,369
Write-offs (4,464) - (4,464)
Recoveries 33 - 33
---------------------------------------------------------------------
Balance at end of period $ 13,554 $ 60,922 $ 74,476
---------------------------------------------------------------------
For the three months ended
April 30, 2008
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 9,248 $ 55,940 $ 65,188
Provision for credit losses 2,598 364 2,962
Write-offs (1,065) - (1,065)
Recoveries 6 - 6
---------------------------------------------------------------------
Balance at end of period $ 10,787 $ 56,304 $ 67,091
---------------------------------------------------------------------
For the six months ended
April 30, 2009
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 15,011 $ 60,527 $ 75,538
Provision for credit losses 6,250 488 6,738
Write-offs (7,223) - (7,223)
Recoveries 46 - 46
---------------------------------------------------------------------
Balance at end of period $ 14,084 $ 61,015 $ 75,099
---------------------------------------------------------------------
For the six months ended
April 30, 2008
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 7,414 $ 55,608 $ 63,022
Provision for credit losses 5,079 696 5,775
Write-offs (1,739) - (1,739)
Recoveries 33 - 33
---------------------------------------------------------------------
Balance at end of period $ 10,787 $ 56,304 $ 67,091
---------------------------------------------------------------------
7. Impaired and Past Due Loans
Outstanding gross loans and impaired loans, net of allowances for
credit losses, by loan type, are as follows.
As at April 30, 2009
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,317,270 $ 17,809 $ 862 $ 16,947
Real estate(1)(3) 3,929,189 65,515 7,566 57,949
Industrial 1,359,937 20,709 3,675 17,034
Commercial 2,510,221 2,984 1,981 1,003
---------------------------------------------------------------------
Total $ 9,116,617 $ 107,017 $ 14,084 92,933
---------------------------------------------------------
General
allowance(2) (61,015)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ 31,918
---------------------------------------------------------------------
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) 3,864,064 75,092 4,698 70,394
Industrial 1,416,287 16,115 5,962 10,153
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
---------------------------------------------------------------------
As at April 30, 2008
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,159,586 $ 6,417 $ 283 $ 6,134
Real estate(1) 3,232,475 11,223 920 10,303
Industrial 1,580,911 14,972 3,948 11,024
Commercial 2,036,755 10,406 5,636 4,770
---------------------------------------------------------------------
Total $ 8,009,727 $ 43,018 $ 10,787 32,231
---------------------------------------------------------
General
allowance(2) (56,304)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ (24,073)
---------------------------------------------------------------------
(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) Real estate includes foreclosed real estate with a carrying value
of $3,505 (2008 - nil) which is held for sale.
Outstanding impaired loans, net of allowance for credit losses, by
provincial location of security, are as follows.
As at April 30, 2009
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 46,534 $ 4,424 $ 42,110
British Columbia 58,171 8,568 49,603
Saskatchewan 1,565 620 945
Manitoba 402 402 -
Other 345 70 275
---------------------------------------------------------------------
Total $ 107,017 $ 14,084 92,933
--------------------------------------------------------
General allowance(1) (61,015)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 31,918
---------------------------------------------------------------------
As at January 31, 2009
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 54,925 $ 5,204 $ 49,721
British Columbia 50,166 7,134 43,032
Saskatchewan 1,801 609 1,192
Manitoba 388 388 -
Other 505 219 286
---------------------------------------------------------------------
Total $ 107,785 $ 13,554 94,231
--------------------------------------------------------
General allowance(1) (60,922)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 33,309
---------------------------------------------------------------------
As at April 30, 2008
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 18,586 $ 8,071 $ 10,515
British Columbia 21,757 1,778 19,979
Saskatchewan 2,167 499 1,668
Manitoba 508 439 69
Other - - -
---------------------------------------------------------------------
Total $ 43,018 $ 10,787 32,231
--------------------------------------------------------
General allowance(1) (56,304)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ (24,073)
---------------------------------------------------------------------
(1) The general allowance for credit risk is not allocated by
province.
During the three and six months ended April 30, 2009, interest
recognized as income on impaired loans totaled $726 and $932
respectively (2008 - $115 and $178).
Gross impaired loans exclude certain past due loans which are loans
where payment of interest or principal is contractually in arrears
but which are not classified as impaired. Details of such past due
loans that have not been included in the gross impaired amount are as
follows:
As at April 30, 2009
-----------------------------------------------------
1 - 30 31 - 60 61 - 90 More than
days days days 90 days Total
---------------------------------------------------------------------
Residential
mortgages $ 20,580 $ 2,111 $ 3,381 $ - $ 26,072
Other loans 34,572 - 5,517 - 40,089
---------------------------------------------------------------------
$ 55,152 $ 2,111 $ 8,898 $ - $ 66,161
---------------------------------------------------------------------
As at As at
January 31, April 30,
2009 2008
--------------------
Total Total
------------------------------------
Residential
mortgages $ 21,448 $ 21,990
Other loans 27,760 17,840
------------------------------------
$ 49,208 $ 39,830
------------------------------------
8. Derivative Financial Instruments
For the three and six months ended April 30, 2009, a net unrealized
after tax gain of $2,532 and $5,968 respectively (2008 - $1,529 and
$3,338) was recorded in other comprehensive income for changes in
fair value of the effective portion of derivatives designated as cash
flow hedges, and $nil (2008 - $nil) was recorded in other income for
changes in fair value of the ineffective portion of derivatives
classified as cash flow hedges. Amounts accumulated in other
comprehensive income are reclassified to net income in the same
period that interest on certain floating rate loans (i.e. the hedged
items) affect income. For the three and six months ended April 30,
2009, a net gain after tax of $3,485 and $4,996 respectively (2008 -
$179 and $267) was reclassified to net income. During the quarter,
$5,410 after tax (2008 - $938) was reclassified to other liabilities
for derivatives terminated prior to maturity and the deferred balance
will be amortized into net interest income over the original hedged
period. A net gain of $4,155 (2008 - $2,206) after tax recorded in
accumulated other comprehensive income (loss) as at April 30, 2009 is
expected to be reclassified to net income in the next 12 months and
will offset variable cash flows from floating rate loans.
The following table shows the notional value outstanding for
derivative financial instruments and the related fair value.
As at April 30, 2009
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges(1) $ 328,000 $ 4,422 $ 737
Equity contracts(2) 2,000 - 100
Foreign exchange contracts(3) 3,007 5 15
Embedded derivatives in
equity-linked deposits(2) n/a 97 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 4,524 $ 852
---------------------------------------------------------------------
As at January 31, 2009
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges(1) $ 513,000 $ 12,848 $ 75
Equity contracts(2) 4,440 - 169
Foreign exchange contracts(3) 4,280 4 37
Embedded derivatives in
equity-linked deposits(2) n/a 184 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 13,036 $ 281
---------------------------------------------------------------------
As at April 30, 2008
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges $ 693,000 $ 3,632 $ 74
Equity contracts 4,400 320 -
Foreign exchange contracts 71,299 14 456
Embedded derivatives in
equity-linked deposits n/a - 316
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 3,966 $ 846
---------------------------------------------------------------------
(1) Interest rate swaps outstanding at April 30, 2009 mature between
May 2009 and June 2010.
(2) Equity contracts and equity-linked deposits outstanding at
April 30, 2009 mature between March 2010 and March 2011.
(3) Foreign exchange contracts outstanding at April 30, 2009 mature
between May 2009 and December 2009.
n/a - not applicable.
There were no forecasted transactions that failed to occur during the
three and six months ended April 30, 2009.
9. Capital Stock
Share Capital For the three months ended
---------------------------------------------------
April 30, 2009 April 30, 2008
---------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------------------------------------------------------------------
Preferred Shares
- Series 3
Outstanding at
beginning of
period - $ - - $ -
Issued during
the period 8,390,000 209,750 - -
---------------------------------------------------------------------
Outstanding at
end of period 8,390,000 209,750 - -
---------------------------------------------------------------------
Common Shares
Outstanding at
beginning of
period 63,468,132 222,010 63,146,077 220,217
Issued on
exercise or
exchange of
options 120,388 333 88,373 250
Transferred
from
contributed
surplus on
exercise or
exchange of
options - 719 - 167
---------------------------------------------------------------------
Outstanding at
end of period 63,588,520 223,062 63,234,450 220,634
---------------------------------------------------------------------
Share Capital $ 432,812 $ 220,634
---------------------------------------------------------------------
For the six months ended
---------------------------------------------------
April 30, 2009 April 30, 2008
---------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------------------------------------------------------------------
Preferred Shares
- Series 3
Outstanding at
beginning of
period - $ - - $ -
Issued during
the period 8,390,000 209,750 - -
---------------------------------------------------------------------
Outstanding at
end of period 8,390,000 209,750 - -
---------------------------------------------------------------------
Common Shares
Outstanding at
beginning of
period 63,457,142 221,914 62,836,189 219,004
Issued on
exercise or
exchange of
options 131,378 393 398,261 900
Transferred
from
contributed
surplus on
exercise or
exchange of
options - 755 - 730
---------------------------------------------------------------------
Outstanding at
end of period 63,588,520 223,062 63,234,450 220,634
---------------------------------------------------------------------
Share Capital $ 432,812 $ 220,634
---------------------------------------------------------------------
During March 2009, the Bank issued 8.4 million Preferred Units at
$25 per unit, for total proceeds of $209.8 million. Of the total,
5.4 million Preferred Units were issued by way of a private placement
for total proceeds of $135.0 million, and 3.0 million were issued
under a public offering for total proceeds of $74.8 million.
The Preferred Units issued by way of the private placement and the
public offering each consist of one Non-Cumulative 5-Year Rate Reset
Preferred Share, Series 3 (Series 3 Preferred Shares) in the capital
of the Bank with an issue price of $25.00 per share and 1.7857 and
1.7800 common share purchase warrants, respectively. Each warrant is
exercisable at a price of $14.00 to purchase one common share in the
capital of the Bank until March 3, 2014.
Holders of the Series 3 Preferred Shares are entitled to receive non-
cumulative quarterly fixed dividends for the initial five-year period
ending April 30, 2014 of 7.25% per annum, payable quarterly, as and
when declared by the Board of Directors. The dividend rate on Series
3 Preferred Shares will reset May 1, 2014 and every five years
thereafter at a level of 500 basis points over the then current five-
year Government of Canada bond yield. On April 30, 2014, and every
five years thereafter, holders of Series 3 Preferred Shares will,
subject to certain conditions, have the option to convert their
shares to Non-Cumulative Floating Rate Preferred Shares, Series 4
(Series 4 Preferred Shares). Holders of the Series 4 Preferred Shares
will be entitled to a floating quarterly dividend rate equal to the
90-day Canadian treasury bill rate plus 500 basis points, as and when
declared by the Board of Directors.
The Series 3 Preferred Shares are not redeemable prior to April 30,
2014. Subject to the provisions of the Bank Act, the prior consent of
OSFI and the provisions described in the prospectus for the public
offering, on April 30, 2014 and on April 30 every five years
thereafter, the Bank may redeem all or any part of the then
outstanding Series 3 Preferred Shares at the Bank's option without
the consent of the holder, by the payment of an amount in cash for
each such share so redeemed of $25.00 together with all declared and
unpaid dividends to the date fixed for redemption.
Subject to the provisions of the Bank Act, the prior consent of OSFI
and the provisions described in the prospectus for the public
offering, on not more than 60 nor less than 30 days' notice, the Bank
may redeem all or any part of the then outstanding Series 4 Preferred
Shares at the Bank's option without the consent of the holder by the
payment of an amount in cash for each such share so redeemed of: (i)
$25.00 together with all declared and unpaid dividends to the date
fixed for redemption in the case of redemptions on April 30, 2019 and
on April 30 every five years thereafter; or (ii) $25.50 together with
all declared and unpaid dividends to the date fixed for redemption in
the case of redemptions on any other date on or after April 30, 2014.
Warrants to Purchase Common Shares
For the three and six months ended
---------------------------------------------------
April 30, 2009 April 30, 2008
---------------------------------------------------------------------
Number of Exercise Number of Exercise
Warrants Price Warrants Price
---------------------------------------------------------------------
Outstanding at
beginning of
period - $ - - $ -
Issued during
the period 14,964,980 14.00
---------------------------------------------------------------------
Outstanding at
end of period 14,964,980 $ 14.00 - $ -
---------------------------------------------------------------------
The warrants issued during March 2009 were part of the Preferred Unit
issuance discussed in the section above.
10. Employee Stock Options
For the three months ended
---------------------------------------------------
April 30, 2009 April 30, 2008
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------------------------------------------------------------
Options
Balance at
beginning of
period 6,173,917 $ 19.41 5,087,269 $ 19.26
Granted 16,500 8.58 5,500 22.98
Exercised or
exchanged (445,000) 10.06 (120,477) 8.97
Forfeited (1,301,162) 27.12 (31,050) 21.55
---------------------------------------------------------------------
Balance at end
of period 4,444,255 $ 18.05 4,941,242 $ 19.50
---------------------------------------------------------------------
For the six months ended
---------------------------------------------------
April 30, 2009 April 30, 2008
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------------------------------------------------------------
Options
Balance at
beginning of
period 5,204,882 $ 20.83 4,911,277 $ 16.96
Granted 1,006,535 11.71 601,342 31.11
Exercised or
exchanged (466,000) 10.06 (529,527) 8.90
Forfeited (1,301,162) 27.12 (41,850) 22.44
---------------------------------------------------------------------
Balance at end
of period 4,444,255 $ 18.05 4,941,242 $ 19.50
---------------------------------------------------------------------
Exercisable at
end of period 1,458,500 $ 14.25 1,158,050 $ 9.74
---------------------------------------------------------------------
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 466,000
options (2008 - 529,527) exercised or exchanged in the six months
ended April 30, 2009, option holders exchanged the rights to 432,000
options (2008 - 419,077) and received 97,378 shares (2008 - 287,811)
in return under the cashless settlement alternative.
For the six months ended April 30, 2009, salary expense of $4,581
(2008 - $2,704) was recognized relating to the estimated fair value
of options granted since November 1, 2002, which included the stock
option forfeiture discussed below. The fair value of options granted
was estimated using a binomial option pricing model with the
following variables and assumptions: (i) risk-free interest rate of
2.1% (2008 - 4.1%), (ii) expected option life of 4.0 years (2008 -
4.0 years), (iii) expected volatility of 35% (2008 - 21%), and (iv)
expected dividends of 4.0% (2008 - 1.3%). The weighted average fair
value of options granted was estimated at $1.91 (2008 - $6.66) per
share.
During the period, certain employees voluntarily and irrevocably
released, without consideration, all right, title and interest in
1,283,062 stock options. The unamortized fair value of these
forfeited options ($1,696) has been recognized as additional non-tax
deductible salary expense with an offsetting increase to contributed
surplus.
During the second quarter of 2009, 750,000 additional options, which
were granted in the first quarter of 2009, received shareholder and
TSX approval.
Further details relating to stock options outstanding and exercisable
at April 30, 2009 follow:
Options Outstanding Options Exercisable
------------------------------------------------------
Weighted
Average
Remaining
Contrac- Weighted Weighted
tual Average Average
Range of Exercise Number of Life Exercise Number of Exercise
Prices Options (years) Price Options Price
-------------------------------------------------------------------------
$ 8.58 to $10.84 414,300 0.5 $ 10.04 397,800 $ 10.11
$11.18 to $17.58 2,038,135 2.9 13.83 1,052,700 15.77
$19.16 to $21.46 1,066,290 2.6 21.45 8,000 19.98
$22.29 to $26.38 697,250 3.3 25.64 - -
$28.11 to $31.18 228,280 3.6 31.13 - -
-------------------------------------------------------------------------
Total 4,444,255 2.7 $ 18.05 1,458,500 $ 14.25
-------------------------------------------------------------------------
11. Contingent Liabilities and Commitments
Significant contingent liabilities and commitments, including
guarantees provided to third parties, are discussed in Note 20 of the
Bank's audited consolidated financial statements for the year ended
October 31, 2008 (see pages 80 to 81 of the 2008 Annual Report) and
include:
As at As at As at
April 30 January 31 April 30
2009 2009 2008
---------------------------------------------------------------------
Guarantees and standby letters
of credit
Balance outstanding $ 218,269 $ 217,270 $ 231,837
Business credit cards
Total approved limit 10,753 11,763 11,169
Balance outstanding 2,204 2,703 2,326
---------------------------------------------------------------------
In the ordinary course of business, the Bank and its subsidiaries are
party to legal proceedings. Based on current knowledge, management
does not expect the outcome of any of these proceedings to have a
material effect on the consolidated financial position or results of
operations.
12. Financial Instruments
As a financial institution, most of the Bank's balance sheet is
comprised of financial instruments and the majority of net income
results from gains, losses, income and expenses related to the same.
Financial instrument assets include cash resources, securities,
securities purchased under resale agreements, loans and derivative
financial instruments. Financial instrument liabilities include
deposits, securities purchased under reverse resale agreements,
derivative financial instruments and subordinated debentures.
The use of financial instruments exposes the Bank to credit,
liquidity and market risk. A discussion of how these and other risks
are managed can be found in the 2008 consolidated annual financial
statements.
The value of financial assets recorded on the consolidated balance
sheet at April 30, 2009 at fair value (cash, securities, securities
purchased under resale agreements and derivatives) was determined
using published market prices quoted in active markets for 95% (2008
- 90%) of the portfolio and estimated using a valuation technique
based on observable market data for 5% (2008 - 10%) of the portfolio.
The value of liabilities recorded on the consolidated balance sheet
at fair value (derivatives and securities purchased under reverse
resale agreements) was determined for the entire portfolio using a
valuation technique based on observable market data.
The table below sets out the fair values of financial instruments
(including certain derivatives) using the valuation methods and
assumptions outlined in the 2008 consolidated annual financial
statements. The table does not include assets and liabilities that
are not considered financial instruments.
April 30, 2009
---------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 572,052 $ 572,052 $ -
Securities 1,649,635 1,649,635 -
Securities purchased
under resale agreements - - -
Loans(1) 9,112,752 9,157,519 44,767
Other assets(2) 86,702 86,702 -
Derivative related 4,524 4,524 -
Liabilities
Deposits(1) 9,731,528 9,881,520 149,992
Other liabilities(3) 364,358 364,358 -
Subordinated debentures 375,000 382,917 7,917
Derivative related 852 852 -
---------------------------------------------------------------------
January 31, 2009
---------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 470,039 $ 470,039 $ -
Securities 1,238,769 1,238,769 -
Securities purchased
under resale agreements 15,000 15,000 -
Loans(1) 9,069,187 9,066,945 (2,242)
Other assets(2) 83,885 83,885 -
Derivative related 12,852 12,852 -
Liabilities
Deposits(1) 9,537,951 9,630,012 92,061
Other liabilities(3) 242,895 242,895 -
Subordinated debentures 375,000 379,288 4,288
Derivative related 97 97 -
---------------------------------------------------------------------
(1) Loans and deposits exclude deferred premiums and deferred
revenue, which are not financial instruments.
(2) Other assets exclude land, buildings and equipment, goodwill and
other intangible assets, reinsurers' share of unpaid claims and
adjustment expenses, future income tax asset, prepaid and
deferred expenses, financing costs and other items that are not
financial instruments.
(3) Other liabilities exclude future income tax liability, deferred
revenue, unearned insurance premiums and other items that are not
financial instruments.
(4) For further information on interest rates associated with
financial assets and liabilities, including derivative
instruments, refer to Note 13.
13. Interest Rate Sensitivity
The Bank's exposure to interest rate risk as a result of a difference
or gap between the maturity or repricing behavior of interest
sensitive assets and liabilities, including derivative financial
instruments, is discussed in Note 28 of the audited consolidated
financial statements for the year ended October 31, 2008 (see page 86
of the 2008 Annual Report). The following table shows the gap
position for selected time intervals.
Asset Liability Gap Positions
Floating
Rate and Total
Within 1 1 to 3 3 Months Within 1
($ millions) Month Months to 1 Year Year
---------------------------------------------------------------------
April 30, 2009
Assets
Cash resources
and securities $ 124 $ 195 $ 279 $ 598
Loans 5,113 649 839 6,601
Other assets - - - -
Derivative
financial
instruments(1) 10 83 211 304
---------------------------------------------------------------------
Total 5,247 927 1,329 7,503
---------------------------------------------------------------------
Liabilities
and Equity
Deposits 3,328 878 2,175 6,381
Other liabilities 86 6 25 117
Debentures - - 60 60
Shareholders' equity - - - -
Derivative financial
instruments(1) 330 - - 330
---------------------------------------------------------------------
Total $ 3,744 $ 884 $ 2,260 $ 6,888
---------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 1,503 $ 43 $ (931) $ 615
---------------------------------------------------------------------
Cumulative Gap $ 1,503 $ 1,546 $ 615 $ 615
---------------------------------------------------------------------
Cumulative Gap
as a percentage
of total assets 12.8% 13.1% 5.2% 5.2%
---------------------------------------------------------------------
January 31, 2009
Assets $ 5,253 $ 717 $ 1,345 $ 7,315
Liabilities
and equity 3,958 641 2,284 6,883
---------------------------------------------------------------------
Interest rate
sensitive gap $ 1,295 $ 76 $ (939) $ 432
---------------------------------------------------------------------
Cumulative gap $ 1,295 $ 1,371 $ 432 $ 432
---------------------------------------------------------------------
Cumulative gap
as a Percentage
of total assets 11.3% 12.0% 3.8% 3.8%
---------------------------------------------------------------------
April 30, 2008
Cumulative gap $ 376 $ 434 $ 99 $ 99
---------------------------------------------------------------------
Cumulative gap
as a percentage
of total assets 3.5% 4.0% 0.9% 0.9%
---------------------------------------------------------------------
Non-
1 Year to More than interest
($ millions) 5 Years 5 Years Sensitive Total
---------------------------------------------------------------------
April 30, 2009
Assets
Cash resources
and securities $ 1,515 $ 79 $ 30 $ 2,222
Loans 2,433 80 (72) 9,042
Other assets - - 187 187
Derivative
financial
instruments(1) 26 - - 330
---------------------------------------------------------------------
Total 3,974 159 145 11,781
---------------------------------------------------------------------
Liabilities
and Equity
Deposits 3,245 105 (18) 9,713
Other liabilities 35 8 267 427
Debentures 240 75 - 375
Shareholders' equity - - 936 936
Derivative financial
instruments(1) - - - 330
---------------------------------------------------------------------
Total $ 3,520 $ 188 $ 1,185 $ 11,781
---------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 454 $ (29) $ (1,040) $ -
---------------------------------------------------------------------
Cumulative Gap $ 1,069 $ 1,040 $ - $ -
---------------------------------------------------------------------
Cumulative Gap
as a percentage
of total assets 9.1% 8.8% -% -%
---------------------------------------------------------------------
January 31, 2009
Assets $ 3,812 $ 149 $ 148 $ 11,424
Liabilities
and equity 3,439 188 914 11,424
---------------------------------------------------------------------
Interest rate
sensitive gap $ 373 $ (39) $ (766) $ -
---------------------------------------------------------------------
Cumulative gap $ 805 $ 766 $ - $ -
---------------------------------------------------------------------
Cumulative gap
as a Percentage
of total assets 7.0% 6.7% -% -%
---------------------------------------------------------------------
April 30, 2008
Cumulative gap $ 814 $ 727 $ - $ -
---------------------------------------------------------------------
Cumulative gap
as a percentage
of total assets 7.6% 6.8% -% -%
---------------------------------------------------------------------
(1) Derivative financial instruments are included in this table at
the notional amount.
(2) Accrued interest is excluded in calculating interest sensitive
assets and liabilities.
(3) Potential prepayments of fixed rate loans and early redemption of
redeemable fixed term deposits have not been estimated.
Redemptions of fixed term deposits where depositors have this
option are not expected to be material. The majority of fixed
rate loans, mortgages and leases are either closed or carry
prepayment penalties.
The effective, weighted average interest rates for each class of
financial assets and liabilities are shown below:
Floating
Rate and Total
Within 1 1 to 3 3 Months Within 1
April 30, 2009 Month Months to 1 Year Year
---------------------------------------------------------------------
Total assets 3.5% 2.6% 4.8% 3.6%
Total liabilities 0.8 2.7 3.6 1.9
---------------------------------------------------------------------
Interest rate
sensitive gap 2.7% (0.1)% 1.2% 1.7%
---------------------------------------------------------------------
January 31, 2009
---------------------------------------------------------------------
Total assets 3.9% 3.1% 5.0% 4.0%
Total liabilities 1.3 2.5 3.9 2.3
---------------------------------------------------------------------
Interest rate
sensitive gap 2.6% 0.6% 1.1% 1.7%
---------------------------------------------------------------------
April 30, 2008
---------------------------------------------------------------------
Total assets 5.4% 4.6% 5.3% 5.3%
Total liabilities 2.8 3.9 4.1 3.2
---------------------------------------------------------------------
Interest rate
sensitive gap 2.6% 0.7% 1.2% 2.1%
---------------------------------------------------------------------
1 Year to More than
April 30, 2009 5 Years 5 Years Total
---------------------------------------------------------
Total assets 5.0% 6.6% 4.1%
Total liabilities 4.0 5.8 2.7
---------------------------------------------------------
Interest rate
sensitive gap 1.0% 0.8% 1.4%
---------------------------------------------------------
January 31, 2009
---------------------------------------------------------
Total assets 5.4% 6.4% 4.5%
Total liabilities 4.2 5.8 2.9
---------------------------------------------------------
Interest rate
sensitive gap 1.2% 0.6% 1.6%
---------------------------------------------------------
April 30, 2008
---------------------------------------------------------
Total assets 5.6% 5.3% 5.4%
Total liabilities 4.3 5.8 3.6
---------------------------------------------------------
Interest rate
sensitive gap 1.3% (0.5)% 1.8%
---------------------------------------------------------
Based on the current interest rate gap position, it is estimated that
a one-percentage point increase in all interest rates would increase
net interest income by approximately 5.6% (January 31, 2009 - 5.8%)
and decrease other comprehensive income $23,383 (January 31, 2009 -
$21,444) 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 4.8% (January 31, 2009 - 7.0%
decrease to net interest income) and increase other comprehensive
income $23,383 (January 31, 2009 - $21,444) 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
--------------------------------------
Three months ended
--------------------------------------
April 30 January 31 April 30
2009 2009 2008
---------------------------------------------------------------------
Net interest income (teb)(1) $ 51,399 $ 53,101 $ 54,325
Less teb adjustment 1,528 1,438 1,252
---------------------------------------------------------------------
Net interest income per
financial statements 49,871 51,663 53,073
Other income(2) 18,125 20,218 13,948
---------------------------------------------------------------------
Total revenues 67,996 71,881 67,021
Provision for credit losses 3,369 3,369 2,962
Non-interest expenses 37,381 33,910 31,207
Provision for income taxes 7,785 9,713 9,779
Non-controlling interest
in subsidiary 56 67 -
---------------------------------------------------------------------
Net income $ 19,405 $ 24,822 $ 23,073
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 11,024 $ 10,711 $ 9,730
---------------------------------------------------------------------
Insurance
--------------------------------------
Three months ended
--------------------------------------
April 30 January 31 April 30
2009 2009 2008
---------------------------------------------------------------------
Net interest income (teb)(1) $ 1,413 $ 1,495 $ 1,334
Less teb adjustment 147 148 100
---------------------------------------------------------------------
Net interest income per
financial statements 1,266 1,347 1,234
Other income(2) 4,445 2,133 4,147
---------------------------------------------------------------------
Total revenues 5,711 3,480 5,381
Provision for credit losses - - -
Non-interest expenses 2,613 2,495 2,246
Provision for income taxes 923 188 906
Non-controlling interest
in subsidiary - - -
---------------------------------------------------------------------
Net income $ 2,175 $ 797 $ 2,229
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 192 $ 188 $ 180
---------------------------------------------------------------------
Total
--------------------------------------
Three months ended
--------------------------------------
April 30 January 31 April 30
2009 2009 2008
---------------------------------------------------------------------
Net interest income (teb)(1) $ 52,812 $ 54,596 $ 55,659
Less teb adjustment 1,675 1,586 1,352
---------------------------------------------------------------------
Net interest income per
financial statements 51,137 53,010 54,307
Other income 22,570 22,351 18,095
---------------------------------------------------------------------
Total revenues 73,707 75,361 72,402
Provision for credit losses 3,369 3,369 2,962
Non-interest expenses 39,994 36,405 33,453
Provision for income taxes 8,708 9,901 10,685
Non-controlling interest
in subsidiary 56 67 -
---------------------------------------------------------------------
Net income $ 21,580 $ 25,619 $ 25,302
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 11,216 $ 10,899 $ 9,910
---------------------------------------------------------------------
Banking and Trust Insurance
--------------------------------------------
Six months ended Six months ended
-------------------------------------------------------------------------
April 30 April 30 April 30 April 30
2009 2008 2009 2008
-------------------------------------------------------------------------
Net interest income (teb)(1) $ 104,500 $ 109,967 $ 2,908 $ 2,738
Less teb adjustment 2,966 2,490 295 199
-------------------------------------------------------------------------
Net interest income per
financial statements 101,534 107,477 2,613 2,539
Other income(2) 38,343 28,343 6,578 7,375
-------------------------------------------------------------------------
Total revenues 139,877 135,820 9,191 9,914
Provision for credit losses 6,738 5,775 - -
Non-interest expenses 71,291 60,711 5,108 4,566
Provision for income taxes 17,498 21,821 1,111 1,654
Non-controlling interest in
subsidiary 123 - - -
-------------------------------------------------------------------------
Net income $ 44,227 $ 47,513 $ 2,972 $ 3,694
-------------------------------------------------------------------------
Total average assets
($ millions)(3) $ 10,867 $ 9,579 $ 190 $ 180
-------------------------------------------------------------------------
Total
----------------------
Six months ended
---------------------------------------------------
April 30 April 30
2009 2008
---------------------------------------------------
Net interest income (teb)(1) $ 107,408 $ 112,705
Less teb adjustment 3,261 2,689
---------------------------------------------------
Net interest income per
financial statements 104,147 110,016
Other income(2) 44,921 35,718
---------------------------------------------------
Total revenues 149,068 145,734
Provision for credit losses 6,738 5,775
Non-interest expenses 76,399 65,277
Provision for income taxes 18,609 23,475
Non-controlling interest in
subsidiary 123 -
---------------------------------------------------
Net income $ 47,199 $ 51,207
---------------------------------------------------
Total average assets
($ millions)(3) $ 11,057 $ 9,759
---------------------------------------------------
(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
called Basel II.
Capital funds are managed in accordance with policies and plans that
are regularly reviewed and approved by the Board of Directors and
take into account forecasted capital needs and markets. The goal is
to maintain adequate regulatory capital to be considered well
capitalized, protect customer deposits and provide capacity for
internally generated growth and strategic opportunities that do not
otherwise require accessing the public capital markets, all while
providing a satisfactory return for shareholders.
During March 2009, the Bank issued 8.4 million Preferred Units for
total proceeds of $209.8 million, which qualify as Tier 1 capital
(refer to Note 9). The Preferred Units were issued by way of the
private placement and the public offering each consist of one Non-
Cumulative 5-Year Rate Reset Preferred Share, Series 3 (Series 3
Preferred Shares) in the capital of the Bank with an issue price of
$25.00 per share and 1.7857 and 1.7800 common share purchase
warrants, respectively. Each warrant is exercisable at a price of
$14.00 to purchase one common share in the capital of the Bank until
March 3, 2014 (refer to note 9).
Additional information about the Bank's capital management practices
is provided in Note 31 to the 2008 audited financial statements
beginning on page 89 of the 2008 Annual Report.
Capital Structure and Regulatory Ratios
As at As at As at
April 30 January 31 April 30
2009 2009 2008
---------------------------------------------------------------------
Capital
Tier 1 $ 1,013,204 $ 787,859 $ 739,724
Total 1,403,487 1,180,204 1,117,667
---------------------------------------------------------------------
Capital ratios
Tier 1 11.0% 8.7% 9.3%
Total 15.2 13.0 14.0
Assets to capital multiple 8.2 x 9.3 x 9.1 x
---------------------------------------------------------------------
During the three and six months ended April 30, 2009, the Bank
complied with all internal and external capital requirements.
16. Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable
entities to International Financial Reporting Standards (IFRS). The
Bank's consolidated financial statements will be prepared in
accordance with IFRS for the fiscal year commencing November 1, 2011
and will include comparative information for the prior year.
The Bank has embarked on a four stage project to identify and
evaluate the impact of the transition to IFRS on the consolidated
financial statements and develop a plan to complete the transition.
The project plan includes the following phases - diagnostic, design
and planning, solution development, and implementation. The
diagnostic phase is complete and the design and planning phase is
underway and expected to be completed by the end of fiscal 2009.
The impact of the transition to IFRS on the Bank's consolidated
financial statements is not yet determinable. Additional information
regarding the Bank's plan and the expected impact of the transition
will be provided as the project moves forward.
-------------------------------------------------------------------------
Shareholder Information
-------------------------------------------------------------------------
Head Office Transfer Agent and Registrar
Canadian Western Bank & Trust Valiant Trust Company
Suite 2300, Canadian Western Suite 310, 606 - 4th Street S.W.
Bank Place Calgary, AB T2P 1T1
10303 Jasper Avenue Telephone: (403) 233-2801
Edmonton, AB T5J 3X6 Fax: (403) 233-2857
Telephone: (780) 423-8888 Website: www.valianttrust.com
Fax: (780) 423-8897 E-mail: inquiries@valianttrust.com
Website: www.cwbankgroup.com
Subsidiary Offices Eligible Dividends Designation
Canadian Western Trust Company CWB designates all dividends for both
Suite 600, 750 Cambie Street common and preferred shares paid
Vancouver, BC V6B 0A2 to Canadian residents as "eligible
Toll-free: 1-800-663-1124 dividends", as defined in the Income
Fax: (604) 669-6069 Tax Act (Canada), unless otherwise
Website: www.cwt.ca noted.
Canadian Direct Insurance Investor Relations
Incorporated
Suite 600, 750 Cambie Street For further financial information
Vancouver, BC V6B 0A2 contact:
Telephone: (604) 699-3678 Kirby Hill, CFA
Fax: (604) 699-3851 Assistant Vice President, Investor and
Website: www.canadiandirect.com Public Relations
Canadian Western Bank
Valiant Trust Company Telephone: (780) 441-3770
Suite 310, 606 - 4th Street S.W. Toll-free: 1-800-836-1886
Calgary, AB T2P 1T1 Fax: (780) 423-8899
Toll-free: 1-866-313-1872 E-mail:
Fax: (403) 233-2857 InvestorRelations@cwbankgroup.com
Website: www.valianttrust.com
Online Investor Information
Adroit Investment Management Ltd.
Suite 2020, 10060 Jasper Avenue Additional investor information
Edmonton, AB T5J 3R8 including supplemental financial
Telephone: (780) 429-3500 information and a corporate
Fax: (780) 429-9680 presentation is available on CWB's
Website: website at www.cwbankgroup.com.
www.adroitinvestments.ca
Quarterly Conference Call and Webcast
Stock Exchange Listings CWB's quarterly conference call and
live audio webcast will take place on
The Toronto Stock Exchange June 4, 2009 at 3:00 p.m. ET.
Common Shares: CWB The webcast will be archived on the
Series 3 Preferred Bank's website at www.cwbankgroup.com
Shares: CWB.PR.A for sixty days. A replay of the
Common Share Purchase conference call will be available until
Warrants: CWB.WT June 18, 2009 by dialing (416) 640-1917
or toll free (877) 289-8525 and
entering passcode 21305850, followed
by the pound sign.
For further information: Larry M. Pollock, President and Chief Executive
Officer, Canadian Western Bank, Phone: (780) 423-8888; Kirby Hill, CFA,
Assistant Vice President, Investor and Public Relations, Canadian Western
Bank, Phone: (780) 441-3770, E-mail: kirby.hill@cwbank.com
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