CWB reports very strong second quarter financial performance
6% quarterly loan growth, including the acquisition of National Leasing Group Inc.
Dividends declared on common and preferred shares
EDMONTON, June 3 /CNW/ - Canadian Western Bank (TSX: CWB) today announced very strong financial performance marking the Bank's 88th consecutive profitable quarter, a period spanning 22 years. Second quarter net income of $37.9 million increased 76% compared to the same quarter last year while diluted earnings per common share increased 57% to $0.47. Significantly higher second quarter earnings mainly reflect an 83 basis point improvement in net interest margin, on a taxable equivalent basis (teb - see definition following Financial Highlights table), compared to the same period in 2009 when this measure dropped to an unprecedented low due to impacts from the global financial crisis. On a year-to-date basis, the combined positive impact of a 70 basis point improvement in net interest margin (teb), a 27% increase in other income and 9% loan growth led to increases in net income and diluted earnings per common share of 65% and 41%, respectively.
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Second Quarter Highlights:
(three months ended April 30, 2010 compared with three months ended
April 30, 2009 unless otherwise noted)
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- Net income of $37.9 million, up 76%.
- Diluted earnings per common share of $0.47, up 57%.
- Record quarterly total revenues (teb) of $111.0 million, up 47%.
- Net interest margin (teb) of 2.76%, up 83 basis points.
- Tier 1 capital ratio of 11.4% and total capital ratio of 14.5%,
compared to 11.0% and 15.2% respectively a year earlier.
- Return on common shareholders' equity of 16.3%, up 530 basis points.
- Surpassed $12 billion in total assets.
- Record net income for Canadian Direct Insurance.
- Completed the acquisition of National Leasing Group Inc. (National
Leasing).
On June 2, 2010, CWB's Board of Directors declared a cash dividend of $0.11 per common share, payable on July 2, 2010 to shareholders of record on June 17, 2010. This quarterly dividend is unchanged from both the previous quarter and one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on July 31, 2010 to shareholders of record on July 22, 2010.
The banking and trust segment, which includes a full three months of performance from newly acquired National Leasing, reported net income of $34.5 million, up 78% compared to the same quarter last year. A significant improvement in net interest margin, including the favourable margin impact from National Leasing, a 38% increase in other income and 9% loan growth helped push this segment's total revenues (teb) up 49% to reach a record $103.4 million. Quarterly net income from insurance operations was a record $3.4 million, up from $2.2 million compared to a year earlier reflecting lower claims experience and continued business growth.
"These very strong results represent a continuation of our exceptional performance last quarter," said Larry Pollock, President and CEO of CWB. Our businesses are performing better than we expected at the onset of fiscal 2010. Although we expect earnings growth to moderate for the remaining two quarters, it's shaping up to be a great year for CWB. We are confident our commitment to building strong customer relationships and focus on sustainable, profitable growth will continue to payoff for both our clients and shareholders."
"National Leasing's opening quarter as part of CWB Group exceeded our expectations and included a bottom line contribution of $3.9 million, or about $0.05 per diluted common share," continued Pollock. "The acquisition has us on track to meet the Bank's fiscal 2010 target for double-digit loan growth and also materially benefited our second quarter net interest margin, which we believe will stabilize from this point. Our overall pipeline for new loans picked up compared to what we've seen over the past couple of quarters and we are optimistic about recent economic indicators in our markets."
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Financial Highlights
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For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except April 30 January 31 April 30 April 30
per share amounts) 2010 2010 2009 2009
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Results of Operations
Net interest income
(teb - see below) $ 80,132 $ 74,306 $ 52,812 52%
Less teb adjustment 2,662 2,563 1,675 59
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Net interest income
per financial
statements 77,470 71,743 51,137 51
Other income 30,840 26,366 22,570 37
Total revenues (teb) 110,972 100,672 75,382 47
Total revenues 108,310 98,109 73,707 47
Net income 37,884 40,035 21,580 76
Earnings per common
share
Basic(1) 0.52 0.57 0.30 73
Diluted(2) 0.47 0.52 0.30 57
Diluted cash(3) 0.48 0.52 0.30 60
Return on common
shareholders'
equity(4) 16.3% 18.0% 11.0% 530
Return on assets(6) 1.17 1.25 0.70 47
Efficiency ratio(7)
(teb) 45.0 40.0 53.1 (810)
Efficiency ratio 46.1 41.0 54.3 (820)
Net interest margin
(teb)(8) 2.76 2.56 1.93 83
Net interest margin 2.67 2.47 1.87 80
Provision for credit
losses as a
percentage of
average loans 0.23 0.16 0.15 8
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Per Common Share
Cash dividends $ 0.11 $ 0.11 $ 0.11 -%
Book value 13.08 12.67 11.42 15
Closing market value 23.99 20.56 13.35 80
Common shares
outstanding
(thousands) 66,309 63,977 63,589 4
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Balance Sheet and
Off-Balance
Sheet Summary
Assets $12,004,281 $11,641,634 $11,450,625 5%
Loans 9,866,669 9,282,180 9,041,518 9
Deposits 10,185,043 10,003,921 9,713,334 5
Subordinated
debentures 315,000 315,000 375,000 (16)
Shareholders'
equity 1,077,111 1,020,642 935,753 15
Assets under
administration 8,223,274 5,461,921 4,472,060 84
Assets under
management 779,721 880,786 816,600 (5)
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Capital Adequacy(9)
Tangible common
equity to
risk-weighted
assets(10) 8.4% 8.4% 7.6% 80
Tier 1 ratio 11.4 11.6 11.0 40
Total ratio 14.5 15.1 15.2 (70)
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For the six months ended
(unaudited) ------------------------- Change from
($ thousands, except April 30 April 30 April 30
per share amounts) 2010 2009 2009
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Results of Operations
Net interest income
(teb - see below) $ 154,438 $ 107,408 44%
Less teb adjustment 5,225 3,261 60
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Net interest income
per financial
statements 149,213 104,147 43
Other income 57,206 44,921 27
Total revenues (teb) 211,644 152,329 39
Total revenues 206,419 149,068 38
Net income 77,919 47,199 65
Earnings per common
share
Basic(1) 1.08 0.70 54
Diluted(2) 0.99 0.70 41
Diluted cash(3) 1.00 0.71 41
Return on common
shareholders'
equity(4) 17.1% 12.9% 420 bp(5)
Return on assets(6) 1.21 0.82 39
Efficiency ratio(7)
(teb) 42.6 50.2 (760)
Efficiency ratio 43.7 51.3 (760)
Net interest margin
(teb)(8) 2.66 1.96 70
Net interest margin 2.57 1.90 67
Provision for credit
losses as a
percentage of
average loans 0.19 0.15 5
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Per Common Share
Cash dividends $ 0.22 $ 0.22 -%
Book value 13.08 11.42 15
Closing market value 23.99 13.35 80
Common shares
outstanding
(thousands) 66,309 63,589 4
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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(9)
Tangible common
equity to
risk-weighted
assets(10)
Tier 1 ratio
Total ratio
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(1) Basic earnings per share is calculated as net income less preferred
share dividends divided by the average number of common shares
outstanding.
(2) Diluted earnings per share is calculated as net income less
preferred share dividends divided by the average number of common
shares outstanding adjusted for the dilutive effects of stock
options and warrants.
(3) Diluted cash earnings per share is diluted earnings per common share
excluding the after-tax amortization of acquisition-related
intangible assets.
(4) Return on common shareholders' equity is calculated as annualized
net income after preferred share dividends divided by average common
shareholders' equity.
(5) bp - basis point change.
(6) Return on assets is calculated as annualized net income after
preferred share dividends divided by average total assets.
(7) Efficiency ratio is calculated as non-interest expenses divided by
total revenues.
(8) Net interest margin is calculated as annualized net interest income
divided by average total assets.
(9) Capital adequacy is calculated in accordance with guidelines issued
by the Office of the Superintendent of Financial Institutions Canada
(OSFI).
(10) Tangible common equity to risk-weighted assets is calculated as
shareholders' equity less subsidiary goodwill divided by
risk-weighted assets, calculated in accordance with guidelines
issued by OSFI.
Taxable Equivalent Basis (teb)
Most banks analyze revenues on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other banks. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.
Non-GAAP Measures
Taxable equivalent basis, diluted cash earnings per common share, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, provision for credit losses as a percentage of average loans and tangible common equity to risk-weighted assets do not have standardized meanings prescribed by generally accepted accounting principles (GAAP) and therefore may not be comparable to similar measures presented by other financial institutions.
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Message to Shareholders
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Canadian Western Bank (CWB or the Bank) is pleased to report very strong financial performance for its 88th consecutive profitable quarter, a period spanning 22 years. Highlights for the second quarter included CWB's acquisition of National Leasing Group Inc. (National Leasing) effective February 1, 2010, which helped total assets surpass the $12 billion milestone.
Second quarter net income of $37.9 million was up 76% ($16.3 million) compared to a year earlier, while diluted earnings per common share increased 57% ($0.17) to $0.47. Lower percentage growth for diluted earnings per common share compared to net income mainly reflects the dilution from CWB's warrants and 2.1 million of additional CWB common shares issued as partial consideration for the acquisition of National Leasing. The quarterly net interest margin was up significantly over the unprecedented low reported in the second quarter last year and was the primary factor influencing earnings growth. Including the positive impact of the considerably higher yield earned on National Leasing's loan portfolio, the net interest margin was also above CWB's historical average levels. Record total revenues (teb) of $111.0 million represent a 47% ($35.6 million) increase reflecting the significant improvement in margin, 37% higher other income and the positive impact of loan growth.
Compared to the prior quarter, net income and diluted earnings per common share decreased 5% and 10%, respectively, as the combined positive impact of strong asset growth, an improved net interest margin and increased other income were more than offset by higher non-interest expenses, three fewer revenue earning days and the provision for credit losses. On a year-to-date basis, net income of $77.9 million was up 65% compared to the same period last year while diluted earnings per common share increased 41% to $0.99. Exceptional year-to-date earnings growth was mainly driven by the significant year-over-year improvement in net interest margin.
The Bank's Tier 1 and total capital ratios at April 30, 2010 remained very strong at 11.4% and 14.5%, respectively. The impact on capital adequacy ratios from the acquisition of National Leasing was largely offset by additional CWB common shares issued and the ongoing retention of earnings.
Return on common shareholders' equity of 16.3% was up 530 basis points compared to the same quarter last year, but down 170 basis points from the prior quarter. Quarterly return on assets of 1.17% represented a 47 basis point improvement from a year earlier and an eight basis point decline compared to last quarter. Compared to the second quarter last year, profitability ratios benefited from the recovery of net interest margin, increased other income and loan growth, partially offset by higher non-interest expenses and the provision for credit losses related to National Leasing's business. The decline in profitability ratios compared to the prior quarter reflects the factors already noted.
Acquisition of National Leasing
On February 1, 2010, CWB completed its previously announced strategic acquisition of 100% of the common shares of National Leasing for a total cost of $126.5 million. In business for over thirty years, National Leasing is a recognized leader in small and mid-size commercial equipment leases for a broad range of industries. With representation across Canada, there are currently over 58,000 active leases that immediately enhance the Bank's product and geographic diversification. We believe funding synergies and new growth opportunities related to the acquisition have potential to significantly increase both net interest income and non-interest income over time. National Leasing is expected to be accretive to the Bank's diluted earnings per common share in the current fiscal year, as demonstrated by the second quarter results.
Dividends
On June 2, 2010, CWB's Board of Directors declared a cash dividend of $0.11 per common share, payable on July 2, 2010 to shareholders of record on June 17, 2010. This quarterly dividend is unchanged from both the previous quarter and one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on July 31, 2010 to shareholders of record on July 22, 2010.
Loan Growth
Total loans grew 6% ($584 million) in the quarter, 7% ($630 million) year-to-date and 9% ($825 million) over the last twelve months including $376 million of on-balance sheet loans at April 30, 2010 from the acquisition of National Leasing. Organic loan growth continued to reflect the realities of moderated economic activity and was further constrained by expected and unexpected repayments on existing accounts, particularly in the equipment financing and real estate construction portfolios. While there are still recession-related challenges across almost all lending areas, the pipeline for new loans has picked up considerably since last quarter. Based on what we see today, and including the growth contribution from National Leasing, we expect to achieve our 2010 target for double-digit loan growth.
Credit Quality
The level of gross impaired loans continues to fluctuate as we progress along the bottom of the current credit cycle. Overall credit quality remains satisfactory considering ongoing economic factors and the impact of a few large accounts. The dollar level of gross impaired loans was $167.2 million, compared to $146.4 million last quarter. Impaired loan formations of $55.6 million were partially offset by $26.2 million of impaired accounts that were paid down or resolved during the quarter. The net difference in the dollar amount of impaired loans compared to the prior quarter was magnified by the impact of a single account connection. A specific provision for credit losses for this account connection of $7.3 million was made in the quarter and led to a decrease in the general allowance. Based on our present view of credit quality, we believe gross impaired loans will peak within the current fiscal year and actual loan losses are expected to remain within acceptable levels. The quarterly provision for credit losses of $5.5 million represented 23 basis points of average loans and includes a $1.8 million provision for National Leasing. Excluding the impact of National Leasing, the provision for credit losses was 16 basis points of average loans, within our target range of 15 to 20 basis points. On a consolidated basis, we now expect the provision for credit losses for fiscal 2010 will represent 20 to 25 basis points of average loans.
Branch Deposit Growth
Deposits raised through our branch network and trust companies were up 2% in the quarter, 2% year-to-date and 14% compared to a year earlier. The demand and notice component within branch-raised deposits, which include lower cost deposits, grew 9% in the quarter, 11% year-to-date and 40% over the past year. The significant growth in demand and notice deposits is consistent with our strategies to further enhance and diversify the Bank's funding sources. Growth also reflects the ongoing success of Canadian Western Trust Company in generating new deposits through its fiduciary business. In addition to the benefits of diversification, our success in shifting the deposit mix toward demand and notice deposits provides an improved funding base to enhance our competitive position and further support net interest margin.
Net Interest Margin
Net interest margin recovered significantly from the trough level experienced in the same quarter last year. Lower deposit costs, more favourable yields on fixed rate loans, the mix of interest-earning assets including lower liquidity, and loan prepayment fees all contributed to an 83 basis point increase in the second quarter net interest margin (teb) to 2.76%. Net interest margin (teb) was up 20 basis points over the prior quarter mainly reflecting the considerably higher yields earned on National Leasing's fixed rate loans. The year-to-date net interest margin (teb) of 2.66% is more typical of spreads achieved prior to the global financial crisis. Increased competition and other factors suggest that further material improvements in margin over that achieved in the second quarter are unlikely.
Trust and Wealth Management
Our trust and wealth management businesses continue to provide opportunities for earnings growth, geographic expansion, income diversification and brand awareness. Canadian Western Trust Company, which includes our Optimum Mortgage business, continued to post very strong financial performance with results tracking ahead of our expectations. Valiant Trust Company is realizing the benefits of increased capital markets activity and continues to grow its client base. We anticipate good opportunities to enhance our presence in wealth management services through both organic growth and acquisitions.
Insurance
Canadian Direct Insurance Incorporated (Canadian Direct) reported a second consecutive record quarter with net income of $3.4 million. Strong results reflect lower claims experience and good growth in policies outstanding of 6% from a year ago. Profitability in the current period was most significant in the auto lines of business.
Outlook
CWB reported excellent second quarter and year-to-date results, and we expect to deliver continued strong performance for the balance of fiscal 2010. Results in the current quarter include the initial contribution from National Leasing and the addition of this business puts us on track to meet our 2010 loan growth target of 10%. While the achievement of double-digit organic loan growth will remain challenging until we enter a period of sustained economic growth, our dedicated team is taking a proactive approach to generating new business. We remain very confident about the benefits of our proven business plan and core geographic position in Western Canada, particularly once the economic recovery takes further hold. We expect gross impaired loans will continue to fluctuate, but our underwriting practices, solid balance sheet and strong capital base ensure we are very well positioned to manage through any ongoing challenges. One of our key objectives is to create ongoing value and growth for CWB shareholders and we continue to evaluate opportunities in this regard, including further acquisitions.
We look forward to reporting our fiscal 2010 third quarter results on September 2, 2010.
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Q2 Results Conference Call
CWB's second quarter results conference call is scheduled for Thursday,
June 3, 2010 at 3:00 p.m. ET (1:00 p.m. MT). The Bank's executives will
comment on financial results and respond to questions from analysts and
institutional investors.
The conference call may be accessed on a listen-only basis by dialing
647-427-7450 or toll-free 1-888-231-8191. The call will also be webcast
live on the Bank's website, www.cwbankgroup.com. The webcast will be
archived on the Bank's website for 60 days.
A replay of the conference call will be available until June 17, 2010 by
dialing 416-849-0833 (Toronto) or 1-800-642-1687 (toll-free) and entering
passcode 71761482.
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About Canadian Western Bank Group
Canadian Western Bank offers a full range of business and personal banking services across the four western provinces and is the largest Canadian owned bank headquartered in Western Canada. The Bank, along with its operating subsidiaries, Canadian Western Trust Company, Valiant Trust Company, Canadian Direct Insurance Incorporated, National Leasing Group Inc., Adroit Investment Management Ltd. and Canadian Western Financial Ltd., collectively offer a diversified range of financial services across Canada and are together known as the Canadian Western Bank Group. The common shares of Canadian Western Bank are listed on the Toronto Stock Exchange under the trading symbol 'CWB'. The Bank's Series 3 preferred shares 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, 2010, as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2009, available on SEDAR at www.sedar.com and the Bank's website at www.cwbankgroup.com. Except as discussed below, the factors discussed and referred to in the MD&A for fiscal 2009 remain substantially unchanged.
Overview
CWB recorded very strong second quarter results reflecting excellent financial performance from both business segments. Consolidated net income increased 76% ($16.3 million) over the same quarter last year to $37.9 million. Second quarter diluted earnings per common share was $0.47 ($0.52 basic), up 57% over the prior year. Lower percentage growth for diluted earnings per common share compared to net income mainly reflects the dilution from CWB's warrants and 2.1 million additional CWB common shares issued as partial consideration for the acquisition of National Leasing.
Net income from the banking and trust segment of $34.5 million was up 78% ($15.1 million) compared to the second quarter last year, a period that marked an unprecedented low for CWB's net interest margin. Positive revenue contributions from a significant improvement in net interest margin, 38% ($6.8 million) higher other income and 9% ($825 million) loan growth more than offset the impact of 26% ($9.7 million) higher non-interest expenses and a $2.1 million increase in the quarterly provision for credit losses. Second quarter banking and trust segment performance includes results from the acquisition of National Leasing Group Inc. (National Leasing), completed on February 1, 2010. Comparatively higher yields earned on National Leasing's portfolio positively impacted the Bank's net interest margin, but the earnings benefit of this higher spread is partially offset by an increased provision for credit losses. Total loan growth in the past twelve months was $825 million including National Leasing's on-balance sheet loans at April 30, 2010 of $376 million. The insurance segment posted record quarterly net income of $3.4 million, up $1.2 million from a year earlier. Strong insurance results mainly reflect favourable claims experience and continued business growth.
Compared to the previous quarter, consolidated net income was down 5% ($2.2 million) as the revenue contribution from National Leasing was offset by higher non-interest expenses, three fewer revenue earning days, $2.4 million lower gains on sale of securities and an increased provision for credit losses. Quarterly diluted earnings per common share decreased 10% ($0.05) reflecting the factors already noted. Consolidated year-to-date net income of $77.9 million was up 65% ($30.7 million) compared to the same period in 2009, while diluted earnings per common share increased 41% to $0.99 ($1.08 basic). The significant year-to-date improvement reflects comparatively strong results across almost all metrics, most notably net interest margin.
Second quarter return on common shareholders' equity was 16.3%, a significant increase from 11.0% a year earlier. Quarterly return on assets was 1.17%, up from 0.70% last year. On a year-to-date basis, return on common shareholders' equity was 17.1%, up from 12.9% in 2009. Return on assets through the first six months was 1.21%, compared to 0.82% last year. Compared to the same period in 2009, higher profitability ratios were mainly driven by very strong growth in net interest income due to the improvement in net interest margin and strong other income, partially offset by increased non-interest expenses and the impact of CWB's preferred unit offerings completed in March 2009.
Total Revenues (teb)
Total revenues, on a taxable equivalent basis (teb - see definition following Financial Highlights table), comprising both net interest income and other income, reached a record $111.0 million for the quarter, up 47% ($35.6 million) compared to a year earlier. Quarterly total revenues reflect the positive impact of a significant improvement in net interest margin and a 37% ($8.3 million) increase in other income. Compared to last quarter, net interest income increased $5.8 million despite three fewer revenue earning days while other income was up $4.5 million. On a year-to-date basis, total revenues of $211.6 million increased 39% ($59.3 million) over the same period last year. Margin improvement and loan growth led to a $47.0 million increase in year-to-date net interest income while other income was up 27% ($12.3 million).
Net Interest Income (teb)
Quarterly net interest income of $80.1 million was up 52% ($27.3 million) compared to the same period last year driven by an 83 basis point improvement in net interest margin to 2.76% and 9% loan growth. The improvement in net interest margin compared to the same quarter in 2009 reflects lower deposit costs, more favourable yields on fixed rate loans, the mix of interest-earning assets including lower liquidity, and increased loan prepayment fees. More favourable yields on fixed rate loans largely reflect the positive impact from National Leasing. In view of the current asset composition, interest rate environment, continued competitive influences and the positive impact from National Leasing, management believes the net interest margin should stabilize around the current level.
Net interest income was up 8% ($5.8 million) compared to the previous quarter reflecting a 20 basis point increase in net interest margin and 6% loan growth, including the loans of National Leasing. The improvement in net interest margin compared to the prior quarter was almost entirely attributed to comparatively higher yields earned on National Leasing's portfolio. On a year-to-date basis, net interest income increased 44% ($47.0 million) due to a 70 basis point improvement in net interest margin that was mainly due to the factors already noted.
Note 13 to the unaudited interim consolidated financial statements summarizes the Bank's exposure to interest rate risk as at April 30, 2010. The estimated sensitivity of net interest income to a change in interest rates is presented in the table below. The amounts represent the estimated change in net interest income over the time periods shown resulting from a one-percentage point change in interest rates. The estimates are based on a number of assumptions and factors, which include:
- a constant structure in the interest sensitive asset and liability
portfolios;
- floor levels for various deposit liabilities;
- prime rate decreases limited to 0.25% due to the historical low
levels of interest rates;
- interest rate changes affecting interest sensitive assets and
liabilities by proportionally the same amount and applied at the
appropriate re-pricing dates; and
- no early redemptions.
April 30 January 31 April 30
($ thousands) 2010 2010 2009(1)
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Impact of 1% increase in interest rates
1 year $ 1,132 $ (2,066) $ 12,409
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1 year percentage change 0.4% (0.8)% 5.6%
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Impact of 1% decrease in interest rates
1 year $ 5,364 $ 8,532 $ 10,473
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1 year percentage change 1.9% 3.2% 4.8%
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(1) Methodology for the calculation of interest sensitivity at April 30,
2009 does not include a minimum interest rate level for certain
deposit accounts that were included in the calculation.
As at April 30, 2010, a one-percentage point increase in interest rates would increase net interest income by 0.4% over the following twelve months; this compares to April 30, 2009 when a one-percentage point increase in interest rates would have increased net interest income by 5.6% over the following twelve months. During 2009, in order to more effectively manage interest rate sensitivity against falling interest rates, many prime-based loans were negotiated with a floor rate and a corresponding minimum interest rate level. Should the prime rate decrease further, the rate on these loans would remain fixed. However, when the prime rate increases, the rate on these loans only begins to go up once the floor rate is passed. In modeling the effects of a one-percentage point increase in interest rates, not all loans would increase by the full one-percentage point, whereas it is assumed that all liabilities increase by the full amount.
As at April 30, 2010, a one-percentage point decrease in interest rates would increase net interest income by 1.9% over the following twelve months; this compares to April 30, 2009 when a one-percentage point decrease in interest rates would have increased net interest income by 4.8% over the following twelve months. When modeling a one-percentage point decrease, the rates on prime-based loans with a negotiated floor rate do not decrease, whereas the remainder of prime-based loans decrease by only 0.25%. Due to the fact that many liabilities are subject to the full one-percentage point decrease, net interest income rises on a decrease in rates as at April 30, 2010.
Based on the interest rate gap position at April 30, 2010, it is estimated that a one-percentage point increase in all interest rates would decrease other comprehensive income by $12.1 million, net of tax (January 31, 2010 - $16.1 million); it is estimated that a one-percentage point decrease in all interest rates at April 30, 2010 would increase other comprehensive income by a similar amount.
It is management's intention to continue to manage the asset liability structure and interest rate sensitivity through pricing and product policies, as well as through the use of interest rate swaps or other appropriate hedging techniques.
Other Income
Second quarter other income of $30.8 million increased 37% ($8.3 million) from a year earlier reflecting growth across nearly all areas. The 'other' category within other income was up $3.3 million and included a $2.4 million change in fair value on National Leasing's interest rate swaps and $0.8 million of lease administration revenues. Credit related fee income was up 60% ($3.2 million). Quarterly net insurance revenues increased 32% ($1.3 million) reflecting favourable claims experience and 7% growth in net earned premiums. Trust and wealth management services revenues and retail services fee income increased 16% ($0.6 million) and 22% ($0.4 million), respectively. Gains on sale of securities of $4.1 million continued to provide a material source of other income, but were down from $6.6 million realized in the same quarter last year. Management expects gains on sale of securities to be considerably lower in future quarters. The $2.4 million positive change in fair value on National Leasing's interest rate swaps is not a sustainable source of revenue going forward as a large portion of this amount relates to the termination of existing swaps no longer required because of the availability of fixed-term funding generated through CWB.
Compared to the previous quarter, other income was up 17% ($4.5 million) as $3.3 million of 'other' other income, $1.9 million of securitization income from National Leasing (refer to Note 5 of the unaudited interim consolidated financial statements for further details on securitization) and a 17% ($1.2 million) increase in credit related fee income more than offset $2.4 million lower gains on sale of securities and the impact of three fewer revenue earning days. Other income year-to-date of $57.2 million increased 27% ($12.3 million) as strong results across CWB's core operations more than offset a $4.2 million decline in gains on sale of securities. National Leasing's revenue contributions, commencing in the second quarter, had a further positive impact on year-to-date other income.
Credit Quality
Overall credit quality remained satisfactory and within current expectations. The Bank's primary markets continue to be impacted by global economic factors, particularly as they relate to demand for commodities. Despite these challenges, management believes that Western Canada is positioned to benefit significantly once there is a sustained period of global economic growth.
For the three months ended
-------------------------------------- Change from
(unaudited) April 30 January 31 April 30 April 30
($ thousands 2010 2010 2009 2009
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Gross impaired loans,
beginning of period $ 146,402 $ 137,944 $ 107,785 36%
New formations 55,586 45,745 29,478 89
Reductions, impaired
accounts paid down
or returned to
performing status (26,229) (30,682) (27,487) (5)
Write-offs (8,530) (6,605) (2,759) 209
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Total(3) $ 167,229 $ 146,402 $ 107,017 56%
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Balance of the ten
largest impaired
accounts $ 97,037 $ 79,513 $ 56,478 72%
Total number of
accounts classified
as impaired(4) 211 234 204 3
Total number of
accounts classified
as impaired under
$1 million(4) 182 209 188 (3)
Gross impaired loans
as a percentage of
total loans(1) 1.68% 1.57% 1.17% 51 bp(2)
(1) Total loans do not include an allocation for credit losses or
deferred revenue and premiums.
(2) bp - basis point change.
(3) Gross impaired loans includes foreclosed assets held for sale with a
carrying value of $695 (January 31, 2010 - $nil and April 30, 2009 -
$3,505).
(4) Total number of accounts excludes National Leasing accounts.
Gross impaired loans at April 30, 2010 were $167.2 million, compared to $146.4 million last quarter and $107.0 million a year earlier. One large account connection with a balance of $30.7 million became impaired in the second quarter and represents the majority of the net increase in gross impaired loans from the prior period. The specific provision for credit losses related to this account connection was $7.3 million and led to a decrease in the general allowance for credit losses in the quarter. The foregoing account connection, plus two additional large accounts with a combined balance of $32.4 million that became impaired in the fourth quarter of fiscal 2009 together represent the majority of the net increase in gross impaired loans compared to a year earlier. The ten largest accounts classified as impaired, measured by dollars outstanding, represented approximately 58% of the total gross impaired loans at quarter end, and compared to 54% in the prior quarter and 53% a year earlier.
Gross impaired loans represented 1.68% of total loans at quarter end, compared to 1.57% last quarter and 1.17% one year ago. It is expected that the level of impaired loans will remain subject to considerable fluctuation until impacts from the current credit cycle subside. The dollar level of gross impaired loans goes up and down as loans become impaired and are subsequently resolved and does not directly reflect the dollar value of expected write-offs given the tangible security held against the Bank's lending positions. The Bank establishes its current estimates of expected write-offs through detailed analyses of both the overall quality and ultimate marketability of the security held against impaired accounts. Based on management's current view of credit quality, the dollar level of gross impaired loans should crest within the current fiscal year. Actual credit losses are expected to remain within acceptable levels through the latter stages of the credit cycle.
The fiscal 2010 target range for the provision for credit losses of 15 to 20 basis points of average loans does not consider the impact of National Leasing. Compared to the Bank's lending portfolio, the nature of National Leasing's business leads to a higher provision for credit losses measured as a percentage of loans. This circumstance is reflected by an increased provision in both the current quarter and looking forward. The second quarter provision for credit losses was 23 basis points of average loans, compared to 16 basis points excluding National Leasing. With the addition of National Leasing, the actual provision for credit losses for the year is likely to be in the range of 20 to 25 basis points of average loans.
The Bank's long-standing strategy with respect to managing the allowance for credit losses has been to maintain a consistent provision to cover both identified and unidentified losses. The purpose of the general allowance for credit losses is to mitigate the timing impact of unidentified losses in the portfolio. Results in the second quarter are consistent with management's expectations that the level of the general allowance will fluctuate as specific losses are recognized and subsequently written-off. Based on results from ongoing stress-testing of the portfolio under various credit scenarios, the adequacy of the general allowance for credit losses is deemed sufficient in consideration of management's current expectations for credit quality and the secured nature of the existing loan portfolio.
The total allowance for credit losses (general and specific) represented 46% of gross impaired loans at quarter end, compared to 50% last quarter and 70% one year ago. The total allowance for credit losses (general and specific) was $76.4 million at April 30, 2010 (including the $6.8 million allowance of National Leasing), compared to $72.6 million last quarter and $75.1 million a year earlier. The general allowance as a percentage of risk-weighted loans was 66 basis points, down from 70 basis points last quarter and 74 basis points one year ago.
Non-interest Expenses
Effective execution of CWB's strategic plan focused on profitable growth over the long-term will continue to require increased spending in certain areas. Significant expenditures relate to additional staff complement as well as expanded premises and technology upgrades. Spending in these areas is an integral part of the Bank's commitment to maximize shareholder value over the long-term and is expected to provide material benefits in future periods. In support of management's objective to enhance the Bank's market presence, two additional full-service banking branches are expected to open late in 2010.
Second quarter non-interest expenses of $50.0 million were up 25% ($10.0 million) compared to last year. Total salary and benefit costs increased $6.1 million, other expenses were $2.6 million higher and premises and equipment expenses were up $1.5 million. National Leasing comprised $6.7 million of the total increase in consolidated non-interest expenses, including $1.0 million of additional amortization of intangibles. Within non-interest expenses and excluding the impact of National Leasing, salary and benefit costs were up 8% ($2.2 million) with the increase attributed to increased staff complement and annual salary increments. Stock-based compensation charges were down slightly compared to a year earlier reflecting additional expense recognized in the second quarter last year for stock options forfeited by certain CWB management. Premises and equipment expenses excluding National Leasing were up $0.8 million in the aggregate over the same quarter last year while other expenses increased $0.4 million.
Compared to the prior quarter, non-interest expenses increased 24% ($9.7 million). Apart from the $6.7 million attributed to National Leasing, the increase was mainly due to higher salary and benefit costs, including $0.9 million of additional expense for restricted share units reflecting CWB's higher average share price in the quarter. Year-to-date non-interest expenses were 18% ($13.8 million) higher than the same period in 2009. Excluding National Leasing, year-to-date non-interest expenses increased 9% ($7.2 million) as higher salary and benefit costs reflecting increased staff complement and annual salary increments more than offset lower stock compensation expense this year. Other changes are consistent with the factors already discussed.
The second quarter efficiency ratio (teb), which measures non-interest expenses as a percentage of total revenues (teb), was 45.0%, compared to 53.1% last year and 40.0% in the previous quarter. The significant improvement compared to 2009 reflects the combined positive impact on total revenues from a strong recovery in net interest margin, increased other income including gains on sale of securities, and loan growth. Considering planned expenditures in conjunction with expectations for relatively stable margins, management expects CWB will be well within its 2010 target for the efficiency ratio of 48% or better. That being said, the year-to-date efficiency ratio (teb) of 42.6% is not expected to be a sustainable benchmark.
Income Taxes
The income tax rate (teb) for the first six months of 2010 was 30.5%, down 110 basis points from the same period one year ago, while the tax rate before the teb adjustment was 27.1%, also 110 basis points lower. The decrease from last year reflects a 100 basis point decrease in the basic federal income tax rate effective July 31, 2009, and a 50 basis point decrease in BC's provincial tax rate effective January 1, 2010.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (OCI), all net of income taxes, and totaled $21.6 million for the second quarter, compared to $32.1 million in the same period last year. The decrease in comprehensive income reflects a decline in OCI resulting from lower unrealized gains on available-for-sale securities. The change in unrealized gains reflects market value fluctuations related to movements in market credit spreads and interest rates, as well as shifts in the interest rate curve. The impact of lower unrealized gains was partially offset by higher second quarter net income, which was up 76% ($16.3 million) compared to the same period last year. Year-to-date comprehensive income totaled $64.3 million, compared to $62.9 million last year. The increase reflects a 65% ($30.7 million) improvement in net income, mostly offset by lower unrealized gains on available-for-sale securities.
Balance Sheet
Total assets increased 3% ($363 million) in the quarter and 5% ($554 million) in the past year to reach $12,004 million at April 30, 2010.
Cash and Securities
Cash, securities and securities purchased under resale agreements totaled $1,827 million at April 30, 2010, compared to $2,170 million last quarter and $2,222 million one year ago (refer to the Treasury Management section of this MD&A for additional details). The unrealized gain recorded on the balance sheet at April 30, 2010 was $7.6 million, compared to $29.7 million last quarter and $10.8 million a year earlier. The considerable change in unrealized gains compared to the prior quarter is largely attributed to a fluctuation in market value of the Bank's preferred share portfolio; unrealized losses in this portfolio totaled $0.8 million as at April 30, 2010, compared to unrealized gains of $13.0 million last quarter. The cash and securities portfolio is mainly comprised of high quality debt instruments that are not held for trading purposes. Fluctuations in fair value are generally attributed to changes in interest rates, market credit spreads and shifts in the interest rate curve. CWB has no credit exposure to sovereign debt outside of Canada.
Realized gains on sale of securities in the second quarter were $4.1 million, compared to $6.5 million in the previous quarter and $6.6 million a year earlier. On a year-to-date basis, gains on sale of securities of $10.6 million were down 28% ($4.2 million) compared to the same period last year. Gains on sale of securities in both the current and prior periods mainly resulted from investment strategies and unusual market conditions that allowed the Bank to capitalize on opportunities to realize gains while maintaining relatively comparable yields on reinvestment in other high quality investment grade securities. Looking forward, the quarterly dollar amount of gains on sale of securities is expected to be considerably lower.
Treasury Management
High liquidity levels were maintained since August 2007 in response to disruptions and related uncertainties in financial markets. Many of these uncertainties have subsided and the Bank has now reduced liquidity to more normal levels. Compared to prior periods where liquidity levels were exceptionally high, this reduction has a positive impact on net interest margin. Barring significant adverse changes in the economic and market environments, liquidity is expected to be managed closer to current levels going forward.
Loans
Total loans of $9,867 million grew 6% ($585 million) in the quarter, 7% ($630 million) year-to-date and 9% ($825 million) in the past twelve months and included $376 million of on-balance sheet loans from the acquisition of National Leasing. Measured by geographic area and excluding National Leasing, all provinces showed loan growth in the quarter with the exception of Alberta. While organic loan growth continued to be constrained by ongoing economic impacts, including both expected and unexpected repayments (payouts and pay downs) on existing loans, the pipeline for new lending activity picked up compared to recent prior quarters. National Leasing adds further geographic and industry diversification to the Bank's loan portfolio. It operates across Canada with the largest concentration of leases sourced in Ontario and also lends to a number of industries not historically targeted by CWB.
Without the impact of National Leasing, all lending sectors showed relatively good quarterly growth with the exception of the equipment financing portfolio. Excluding all equipment financing loans, year-to-date organic loan growth for CWB was 5% with the real estate portfolio (excluding construction loans), personal loans and mortgages, and general commercial loans showing the best percentage growth. The equipment financing portfolio, excluding National Leasing, was down 12% ($151 million) year-to-date. Negative growth in this portfolio reflects both economic factors and its relatively short duration with loans fully repaid over a period of three to five years. Management believes the eventual return to growth of the equipment financing portfolio will be a good leading indicator of a more robust economic recovery in the Bank's markets. Management also continues to believe that Western Canada's resource-based economies are poised for a comparatively stronger recovery than the rest of Canada once overall global activity expands. Looking forward, loan growth is expected to remain constrained until economic factors improve further. With the acquisition of National Leasing, CWB is on track to achieve its 2010 loan growth target of 10%.
Loans in the Bank's alternative mortgage business, Optimum Mortgage (Optimum), increased 9% in the quarter, 20% year-to-date and 40% over the past twelve months to reach $672 million. Optimum's recently established offering of higher ratio insured mortgages has shown positive results and management expects insured mortgages could become a larger component of this portfolio over time. For uninsured mortgages, which currently represent approximately 65% of Optimum's total portfolio, the Bank remains well secured via conventional residential first mortgages carrying a weighted average underwritten loan-to-value ratio at initiation of approximately 70%. The large majority of all Optimum mortgages carry a fixed interest rate with the principal amortized over 25 years or less. Management remains committed to further developing this business as it continues to produce strong returns while maintaining an acceptable risk profile.
Deposits
Total branch deposits, including those raised by trust services, were up 14% ($769 million) compared to a year earlier and 2% ($126 million) from the previous quarter. The demand and notice component within branch deposits was up 40% ($995 million) compared to the same time last year and 9% ($275 million) from last quarter. Growth in demand and notice deposits compared to a year earlier largely reflects Canadian Western Trust Company's ongoing success in generating new trust deposits through growth of its fiduciary business. The significant growth in demand and notice deposits, which include the Bank's lowest cost funding, supports management's objective to further enhance and diversify the Bank's funding sources and can also benefit net interest margin. Valiant Trust Company was approved as a federal deposit-taking institution this year and management is evaluating strategies to utilize this additional channel to raise deposits and increase net interest income.
Total deposits at quarter end were $10,185 million, up 2% ($181 million) from the previous quarter and 5% ($472 million) over the past year. Total branch deposits measured as a percentage of total deposits were 61% at April 30, 2010, unchanged from the previous quarter and up from 56% a year earlier. Compared to April 30, 2009, the increase in branch deposits as a percentage of total deposits reflects the combined impact of very strong growth in the demand and notice component and a 4% ($149 million) decline in fixed rate term deposits raised through the deposit broker network. Demand and notice deposits represented 34% of total deposits at quarter end, compared to 32% in the previous quarter and 26% a year earlier.
Other Assets and Other Liabilities
Other assets at April 30, 2010 totaled $311 million, compared to $190 million last quarter and $187 million one year ago. The change in other assets compared to the previous quarter mainly reflects the acquisition of National Leasing (refer to Note 16 of the unaudited interim consolidated financial statements for further details on the acquisition), including increases in goodwill and other intangible assets of $27.8 million and $39.5 million, respectively. Other liabilities at quarter end were $427 million, compared to $302 million the previous quarter and $427 million last year. The increase in other liabilities compared to the prior quarter mainly reflects the acquisition of National Leasing. Other liabilities in the same period last year included $84 million of securities sold under repurchase agreements, compared to nil in the current quarter.
Off-Balance Sheet
Off-balance sheet items include assets under administration and assets under management. Total assets under administration, including both trust assets and leases under administration, totaled $8,223 million at April 30, 2010, compared to $5,462 million last quarter and $4,472 million one year ago. Assets under management were $780 million at quarter end, compared to $881 million last quarter and $817 million one year ago. The gross amount of securitized loans at quarter end was $276.2 million and reflects the acquisition of National Leasing (refer to Note 5 of the unaudited interim consolidated financial statements for further details on securitization). Other off-balance sheet items are comprised of standard industry credit instruments (guarantees, standby letters of credit and commitments to extend credit), and the non-consolidated variable interest entity. CWB does not utilize, nor does it have exposure to, collateralized debt obligations or credit default swaps. For additional information regarding other off-balance sheet items refer to Notes 14 and 20 to the audited consolidated financial statements on pages 82 and 88 respectively in the Bank's 2009 Annual Report.
Capital Management
At April 30, 2010, CWB's Total capital adequacy ratio, which measures regulatory capital as a percentage of risk-weighted assets, was 14.5%, down from 15.1% last quarter and 15.2% one year ago. The Tier 1 ratio was 11.4%, compared to 11.6% last quarter and 11.0% at the same time last year. Current minimums for the Total and Tier 1 capital adequacy ratios of Canadian Banks as set by the Office of the Superintendent of Financial Institutions Canada (OSFI) are 10% and 7%, respectively.
Compared to one year ago, the Bank's Tier 1 regulatory capital increased with the issuance of additional CWB common shares (including 2.1 million shares issued as partial consideration for National Leasing) and the retention of earnings, net of dividends, partially offset by goodwill attached to the acquisition of National Leasing and a capital deduction relating to its securitized assets. Total regulatory capital was impacted by the foregoing factors, as well as the redemption of $60.0 million of subordinated debentures on November 20, 2009 and an increased deduction for the investment in CWB's insurance subsidiary. Further details regarding changes in CWB's regulatory capital and capital adequacy ratios compared to prior periods are included in the following table:
As at As at As at Change from
(unaudited) April 30 January 31 April 30 April 30
($ thousands) 2010 2010 2009 2009
-------------------------------------------------------------------------
Regulatory Capital
Tier 1 Capital
before
deductions $ 1,176,975 $ 1,104,200 $ 1,022,563 $ 154,412
Less: Goodwill (37,191) (9,359) (9,359) (27,832)
Securitization
(National
Leasing) (11,176) 0 0 (11,176)
-------------------------------------------------------------------------
Tier 1 Capital 1,128,608 1,094,841 1,013,204 115,404
-------------------------------------------------------------------------
Tier 2 Capital
before
deductions 380,080 386,074 441,015 (60,935)
Less: Investment
in insurance
subsidiary (63,431) (60,073) (50,732) (12,699)
Securitization
(National
Leasing) (11,176) - - (11,176)
-------------------------------------------------------------------------
Total Tier 2 Capital 305,473 326,001 390,283 (84,810)
-------------------------------------------------------------------------
Total Regulatory
Capital $ 1,434,081 $ 1,420,842 $ 1,403,487 $ 30,594
-------------------------------------------------------------------------
Risk Weighted Assets $ 9,882,832 $ 9,422,366 $ 9,195,541 $ 687,291
-------------------------------------------------------------------------
Tier 1 capital
adequacy ratio 11.4% 11.6% 11.0% 40 bp(1)
Total capital adequacy
ratio 14.5 15.1 15.2 (70)
(1) bp - basis point change.
CWB expects to remain very well capitalized. The ongoing retention of earnings should more than support capital requirements associated with the anticipated achievement of the fiscal 2010 target for double-digit loan growth. The Bank's very strong capital ratios provide considerable flexibility and management continues to evaluate alternatives to deploy capital for the long-term benefit of CWB shareholders.
In the fall of 2009, OSFI indicated that amendments would be forthcoming to the capital adequacy guidelines as a result of a global review of the adequacy of capital levels during the global financial crisis. In December 2009, the Basel Committee on Banking Supervision (the Committee) issued a Consultative Document entitled Strengthening the Resilience of the Banking Sector. The document as written represents a substantial change to the current guideline and has a strong emphasis on the quality and characteristics of Tier 1 capital. The Committee did not provide any indication as to minimum regulatory capital levels as they need to consider extensive feedback received from financial institutions and intend to study the quantitative impact of the draft framework before calibrating the standards. The Committee's initial time line would result in new standards being issued by the end of 2010 to be phased in by the end of 2012. CWB has a very strong capital position and expects implementation of the final set of standards should be relatively straightforward to manage given the lack of complexity in the Bank's current composition of regulatory capital, including an already strong component of tangible common equity.
Further information relating to the Bank's capital position is provided in Note 15 of the unaudited interim consolidated financial statements as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2009.
Book value per common share at April 30, 2010 was $13.08 compared to $12.67 last quarter and $11.42 one year ago.
Common shareholders received a quarterly cash dividend of $0.11 per common share on April 1, 2010. On June 2, 2010, CWB's Board of Directors declared a cash dividend of $0.11 per common share, payable on July 2, 2010 to shareholders of record on June 17, 2010. This quarterly dividend is unchanged from both the previous quarter and one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on July 31, 2010 to shareholders of record on July 22, 2010.
Acquisitions
On February 1, 2010, the Bank acquired 100% of the common shares of National Leasing for a total cost of $126.5 million. Consideration for the acquisition included $52.8 million cash, 2,065,088 common shares of CWB ($42.6 million) and contingent consideration. Both the Bank and the vendors have the option to trigger payment of the contingent consideration no earlier than November 1, 2012. The future value of the contingent consideration is not yet determinable and the difference will be recognized as an adjustment to goodwill in the period in which the contingency is resolved. Refer to Note 16 of the unaudited interim consolidated financial statements for further details on the acquisition.
Changes in Accounting Policies
There were no new significant accounting policies adopted during the quarter for purposes of presenting the Bank's financial statements under Canadian generally accepted accounting principles.
Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable entities to International Financial Reporting Standards (IFRS). The Bank's consolidated financial statements will be prepared in accordance with IFRS for the fiscal year commencing November 1, 2011 and will include comparative information for the prior year.
During 2008, the Bank commenced a four stage project to identify and evaluate the impact of the transition to IFRS on the consolidated financial statements and develop a plan to complete the transition. The project plan includes the following phases - diagnostic, design and planning, solution development, and implementation. The diagnostic and the design and planning phases are complete, and the solution development phase is expected to be completed by the end of fiscal 2010. Further information on the Bank's transition plan is provided on pages 56 to 58 of the 2009 Annual Report.
The exact impact of the initial transition to IFRS on the Bank's November 1, 2010 consolidated financial statements for current standards is not yet determinable. The following areas have been identified as having the most significant potential for change on transition:
- Loan loss accounting - Although both existing Canadian GAAP and IFRS
calculate loan losses using the incurred loss model, IFRS is more
specific as to what qualifies as an "incurred event". Under IFRS,
incurred losses require objective evidence of impairment, must have a
reliably measurable effect on the present value of estimated cash
flows and be supported by currently observable data. This difference
is not expected to impact the calculation of the specific allowance
for credit losses but may impact the calculation of the general (or
collective) allowance. The Bank is developing an appropriate IFRS
methodology but it is not yet determinable whether any adjustments
will be required on transition.
- Derecognition - Under IFRS, National Leasing's securitized leases
(totaling $276.2 million at April 30, 2010) would be reported on the
balance sheet.
- Consolidation - Canadian Western Bank Capital Trust will be
consolidated under IFRS. For more information about this entity see
note 14 on page 82 of the October 31, 2009 audited consolidated
financial statements.
CWB continues to monitor the International Accounting Standards Board's proposed changes to standards during Canada's transition to IFRS. These proposed changes may have a significant impact on the Bank's implementation plan and future financial statements.
Controls and Procedures
There were no changes in the Bank's internal controls over financial reporting that occurred during the quarter ended April 30, 2010 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.
The Bank's certifying officers have limited the scope of design of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) to exclude the controls, policies and procedures of National Leasing, acquired this quarter. The limitation will be removed no later than January 31, 2011.
Prior to its release, this quarterly report to shareholders was reviewed by the Audit Committee and, on the Audit Committee's recommendation, approved by the Board of Directors of Canadian Western Bank.
Updated Share Information
As at May 28, 2010, there were 66,324,147 common shares outstanding. Also outstanding were employee stock options, which are or will be exercisable for up to 4,221,465 common shares for maximum proceeds of $81.6 million and 14,838,784 warrants that are each exercisable until March 3, 2014 to purchase one common share in the Bank at a price of $14.00.
Dividend Reinvestment Plan
The Bank's common shares (TSX: CWB) and preferred shares (TSX: CWB.PR.A) are deemed eligible to participate in CWB's dividend reinvestment plan (the "Plan"). The Plan provides holders of the Bank's eligible shares the opportunity to direct cash dividends toward the purchase of common shares. Further details for the Plan are available on the Bank's website at http://www.cwbankgroup.com /investor_relations/drip.htm. At the current time, for the purposes of the Plan, the Bank has elected to issue common shares from treasury at a 2% discount from the average market price (as defined in the Plan).
Normal Course Issuer Bid
On January 18, 2010, CWB received approval from the Toronto Stock Exchange to initiate a Normal Course Issuer Bid (NCIB) and purchase, for cancellation, up to 748,058 of its warrants. The NCIB commenced January 20, 2010 and will expire January 19, 2011. From January 20 to April 30, 2010, the Bank purchased and cancelled 72,928 warrants at an average purchase price per warrant of $9.56; the aggregate amount of the warrant purchases was charged to retained earnings. A copy of the NCIB news release is available on the Bank's website and on SEDAR at www.sedar.com.
Summary of Quarterly Financial Information
2010 2009
------------------- ---------------------------------------
($ thousands) Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Total
revenues
(teb) $110,972 $100,672 $ 90,099 $ 85,538 $ 75,382 $ 76,947
Total
revenues 108,310 98,109 87,702 83,349 73,707 75,361
Net income 37,884 40,035 30,357 28,729 21,580 25,619
Earnings per
common share
Basic 0.52 0.57 0.42 0.39 0.30 0.40
Diluted 0.47 0.52 0.39 0.38 0.30 0.40
Diluted cash 0.48 0.52 0.39 0.38 0.30 0.41
Total assets
($ millions) 12,004 11,642 11,636 11,331 11,450 10,907
-------------------------------------------------------------------------
2008
-------------------
($ thousands) Q4 Q3
---------------------------------
Total
revenues
(teb) $ 74,059 $ 76,375
Total
revenues 72,519 74,933
Net income 24,485 26,327
Earnings per
common share
Basic 0.39 0.42
Diluted 0.38 0.41
Diluted cash 0.38 0.41
Total assets
($ millions) 10,601 10,057
---------------------------------
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.
The Bank's quarterly financial results are subject to some fluctuation due to its exposure to property and casualty insurance. Insurance operations, which are primarily reflected in other income (refer to Results by Business Segment - Insurance), are subject to seasonal weather conditions, cyclical patterns of the industry and natural catastrophes. Mandatory participation in the Alberta auto risk sharing pools can also result in unpredictable quarterly fluctuations.
During the fourth quarter of 2008 and throughout fiscal 2009 the Bank's quarterly net interest income was negatively impacted by compression of the net interest margin that mainly resulted from consecutive reductions in the prime lending interest rate, coupled with significantly higher deposit costs and other spin-off effects of the global financial crisis. Gains on sale of securities, reflected in other income, were unusually high during the same period also mainly due to factors associated with the financial crisis, including a steep interest rate curve and wide credit spreads that allowed the Bank to capitalize on investment strategies. In the first quarter of fiscal 2010, net interest margin recovered to more typical levels achieved before the onset of the global financial crisis. Quarterly results can also fluctuate due to the recognition of periodic income tax items.
The acquisition of National Leasing was effective February 1, 2010 and the results of its operations and financial position are consolidated as part of the Bank's overall financial performance beginning with the second quarter of 2010 (refer to Results by Business Segment - Banking & trust). The acquisition had a positive impact on all categories in the table above.
For details on variations between the prior quarters, refer to the summary of quarterly results section of the Bank's MD&A for the year ended October 31, 2009 and the individual quarterly reports to shareholders which are available on SEDAR at www.sedar.com and on CWB's website at www.cwbankgroup.com. The 2009 Annual Report and audited consolidated financial statements for the year ended October 31, 2009 are available on both SEDAR and the Bank's website.
Results by Business Segment
CWB operates in two business segments: 1) banking and trust, and 2) insurance. Segmented information is also provided in Note 14 of the unaudited interim consolidated financial statements.
Banking and trust
Operations of the banking and trust segment comprise all commercial and retail banking services including equipment leasing offered by National Leasing, acquired on February 1, 2010. The banking and trust segment also includes trust, wealth management and other financial services provided through Canadian Western Trust Company, Valiant Trust Company and Adroit Investment Management Ltd.
Net income of $34.5 million increased 78% ($15.1 million) compared to the same quarter last year driven by an 84 basis point improvement in net interest margin (teb). The significantly higher margin compared to the unprecedented low established a year earlier led to a 53% ($27.0 million) increase in quarterly net interest income (teb). The change in net interest margin (teb) mainly resulted from lower deposit costs, more favourable yields on fixed rate loans, the mix of interest-earning assets including lower liquidity, and loan prepayment fees. National Leasing's portfolio earns considerably higher yields compared to CWB's core business lending and was a key factor contributing to the improvement. The quarterly provision for credit losses increased by $2.1 million and included $1.8 million for National Leasing credit losses which are higher than the Bank's other loan portfolios when measured as a percentage of loans.
Second quarter other income grew 38% ($6.8 million) over a year earlier as very strong fee-based income, including a 60% ($3.2 million) increase in credit related fee income, offset a $2.5 million reduction in gains on sale of securities. Gains on sale of securities are expected to be considerably lower in future periods. Other income also included a $2.4 million positive change in fair value for National Leasing's interest rate swaps and $1.9 million of securitization income. The foregoing sources of other income are likely to reduce in future periods as new lease assets are retained on-balance sheet and funded with fixed rate deposits. The quarterly efficiency ratio (teb), which measures non-interest expense as a percentage of total revenues (teb), was 45.6%, compared to 53.8% last year. Non-interest expenses increased $9.7 million over the same quarter last year (including $6.7 million attributed to National Leasing) and the significant improvement in the efficiency ratio was entirely due to the achievement of record total revenues.
Compared to the prior quarter, earnings were down 6% ($2.2 million) as the combined positive impact of strong asset growth, an improved net interest margin and increased other income was more than offset by higher non-interest expenses, three fewer days and the provision for credit losses. On a year-to-date basis, net income was up 61% mainly driven by a 71 basis point improvement in net interest margin (teb). Net interest income (teb) was up 45% ($46.6 million) over the same period in 2009 while other income increased 19% ($7.2 million). Increased non-interest expenses and the provision for credit losses partially offset the positive earnings impact of record total revenues. The year-to-date efficiency ratio (teb) was 43.1%, an improvement of 680 basis points.
For the three months ended
-------------------------------------- Change from
April 30 January 31 April 30 April 30
($ thousands) 2010 2010 2009 2009
-------------------------------------------------------------------------
Net interest income
(teb) $ 78,436 $ 72,619 $ 51,399 53%
Other income 24,951 20,616 18,125 38
-------------------------------------------------------------------------
Total revenues (teb) 103,387 93,235 69,524 49
Provision for credit
losses 5,487 3,713 3,369 63
Non-interest expenses 47,129 37,627 37,381 26
Provision for income
taxes (teb) 16,245 15,129 9,313 74
Non-controlling
interest in
subsidiary 41 76 56 (27)
-------------------------------------------------------------------------
Net income $ 34,485 $ 36,690 $ 19,405 78%
-------------------------------------------------------------------------
Efficiency ratio
(teb) 45.6% 40.4% 53.8% (820)bp
Efficiency ratio 46.7 41.4 55.0 (830)
Net interest margin
(teb) 2.75 2.54 1.91 84
Net interest margin 2.67 2.46 1.86 81
Average loans
(millions)(1) $ 9,714 $ 9,253 $ 8,982 8%
Average assets
(millions)(1) 11,688 11,317 11,024 6
-------------------------------------------------------------------------
------------------------------------------------------------
For the six months ended
------------------------- Change from
April 30 April 30 April 30
($ thousands) 2010 2009 2009
------------------------------------------------------------
Net interest income
(teb) $ 151,055 $ 104,500 45%
Other income 45,567 38,343 19
------------------------------------------------------------
Total revenues (teb) 196,622 142,843 38
Provision for credit
losses 9,200 6,738 37
Non-interest expenses 84,756 71,291 19
Provision for income
taxes (teb) 31,374 20,464 53
Non-controlling
interest in
subsidiary 117 123 (5)
------------------------------------------------------------
Net income $ 71,175 $ 44,227 61%
------------------------------------------------------------
Efficiency ratio
(teb) 43.1% 49.9% (680)bp
Efficiency ratio 44.2 51.0 (680)
Net interest margin
(teb) 2.65 1.94 71
Net interest margin 2.56 1.88 68
Average loans
(millions)(1) $ 9,484 $ 8,918 6%
Average assets
(millions)(1) 11,502 10,867 6
------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following Financial
Highlights table.
(1) Assets are disclosed on an average daily balance basis.
Insurance
The insurance segment is comprised of the operations of Canadian Direct Insurance Incorporated (Canadian Direct or CDI), which provides auto and home insurance to individuals in BC and Alberta.
Canadian Direct reported record quarterly net income of $3.4 million representing a $1.2 million increase from a year ago. Strong results were driven by improved claims experience and a 7% increase in net earned premiums. Improved claims experience compared to the second quarter of 2009 includes a significant drop in the loss ratio for both the BC home and the Alberta auto product lines due to lower severity. Growth in net earned premiums reflects a 6% increase in policies outstanding and higher average premiums per policy in the home product lines of business.
In comparison to the previous quarter, which included a positive $1.9 million before tax ($1.3 million after tax) contribution from Canadian Direct's share of the Alberta auto risk sharing pools (the Pools), net income increased $0.1 million. Excluding the impact of the Pools from both quarters, net income was up by $1.2 million despite three fewer revenue earning days. The improvement can be attributed to lower net claims expense and an additional $0.3 million of gains on sale of securities. Improved claims experience was most notable in the Alberta auto line where net claims expense decreased by $2.7 million due to lower frequency and severity.
Year-to-date net income of $6.7 million represented a 127% ($3.8 million) increase from the same period last year. Absent the impact of the Pools, the year-over-year increase in net income was 54% ($2.2 million) reflecting 8% growth in net earned premiums and an improvement in net claims expense. Barring any severe weather or other catastrophe type events, Canadian Direct should continue to produce strong results through the remainder of fiscal 2010.
For the three months ended
--------------------------------------- Change from
April 30 January 31 April 30 April 30
($ thousands) 2010 2010 2009 2009
-------------------------------------------------------------------------
Net interest
income (teb) $ 1,696 $ 1,687 $ 1,413 20%
-------------------------------------------------------------------------
Other income (net)
Net earned premiums 26,627 27,331 24,880 7
Commissions and
processing fees 546 618 760 (28)
Net claims and
adjustment expenses (15,784) (16,990) (16,126) (2)
Policy acquisition
costs (5,868) (5,289) (5,316) 10
-------------------------------------------------------------------------
Insurance revenue (net) 5,521 5,670 4,198 32
Gains on sale of
securities 368 80 247 49
-------------------------------------------------------------------------
Total revenues (net)
(teb) 7,585 7,437 5,858 29
Non-interest expenses 2,831 2,621 2,613 8
Provision for income
taxes (teb) 1,355 1,471 1,070 27
-------------------------------------------------------------------------
Net income $ 3,399 $ 3,345 $ 2,175 56%
-------------------------------------------------------------------------
Policies outstanding
(No.) 180,289 177,272 170,433 6
Gross written premiums $ 30,531 $ 24,332 $ 29,120 5
Claims loss ratio(1) 59% 62% 65% (600) bp
Expense ratio(2) 31 27 29 200
Combined ratio(3) 90 89 94 (400)
Alberta auto risk sharing
pools impact on net
income before tax $ 221 $ 1,913 $ 31 613%
Average total assets
(millions) 210 214 192 9
-------------------------------------------------------------------------
For the six months ended
-------------------------- Change from
April 30 April 30 April 30
($ thousands) 2010 2009 2009
------------------------------------------------------------
Net interest
income (teb) $ 3,383 $ 2,908 16%
------------------------------------------------------------
Other income (net)
Net earned premiums 53,958 50,095 8
Commissions and
processing fees 1,164 1,414 (18)
Net claims and
adjustment expenses (32,774) (34,777) (6)
Policy acquisition
costs (11,157) (10,422) 7
------------------------------------------------------------
Insurance revenue (net) 11,191 6,310 77
Gains on sale of
securities 448 268 67
------------------------------------------------------------
Total revenues (net)
(teb) 15,022 9,486 58
Non-interest expenses 5,452 5,108 7
Provision for income
taxes (teb) 2,826 1,406 101
------------------------------------------------------------
Net income $ 6,744 $ 2,972 127%
------------------------------------------------------------
Policies outstanding
(No.) 180,289 170,433 6
Gross written premiums $ 54,863 $ 52,223 5
Claims loss ratio(1) 60% 69% (900) bp
Expense ratio(2) 29 29 -
Combined ratio(3) 89 98 (900)
Alberta auto risk sharing
pools impact on net
income before tax $ 2,134 $ (127) nm %
Average total assets
(millions) 212 190 12
------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following Financial
Highlights table.
nm - not meaningful.
(1) Net claims and adjustment expenses as a percentage of net earned
premiums.
(2) Policy acquisition costs and non-interest expenses net of commissions
and processing fees as a percentage of net earned premiums.
(3) Sum of the claims loss and expense ratios.
Fiscal 2010 Minimum Targets and Outlook
The minimum performance targets established for the 2010 fiscal year
together with CWB's actual performance are presented in the table below:
------------------------------
2010 2010
Minimum Year-to-date
Targets Performance(1)
-------------------------------------------------------------------------
Net income growth(2) 12% 65%
-------------------------------------------------------------------------
Total revenue (teb) growth 12% 39%
-------------------------------------------------------------------------
Loan growth 10% 9%
-------------------------------------------------------------------------
Provision for credit losses as a percentage
of average loans 0.15% - 0.20% 0.19%
-------------------------------------------------------------------------
Efficiency ratio (teb) 48% 42.6%
-------------------------------------------------------------------------
Return on common equity(3) 13% 17.1%
-------------------------------------------------------------------------
Return on assets(4) 0.90% 1.21%
-------------------------------------------------------------------------
(1) 2010 year-to-date performance for earnings and revenue growth is the
current year results over the same period in the prior year, loan
growth is the increase over the past twelve months, and performance
for ratio targets is the current year-to-date results annualized.
(2) Net income, before preferred share dividends.
(3) Return on common equity calculated as annualized net income after
preferred share dividends divided by average common shareholders'
equity.
(4) Return on assets calculated as annualized net income after preferred
share dividends divided by average total assets.
The faster than expected recovery in net interest margin in the first quarter to more normal historical levels continued to have a very positive influence on overall financial performance. The acquisition of National Leasing further increased net interest margin and also impacts other key performance metrics, most notably loan growth and the provision for credit losses. In view of the foregoing, the majority of 2010 minimum targets do not accurately reflect management's current expectations. The contribution from National Leasing has the Bank on track to meet its 10% loan growth target. National Leasing's portfolio earns a relatively high yield that is accompanied by increased loan losses compared to the Bank's core lending business. The target range for the provision for credit losses as shown above does not reflect expected losses attributed to this portfolio and the actual consolidated provision for the year is now anticipated to be 20 to 25 basis points.
While the Bank should significantly surpass the minimum growth targets for net income and total revenues, year-to-date performance does not directly indicate expected annual growth given that fiscal 2009 comparative results were much better in the latter half of the year. Return on equity and return on assets for the year will also benefit from the robust recovery of net interest margin, although this positive impact will be partially offset by expectations for considerably lower gains on sale of securities going forward. Further growth in revenues, including the net impact from National Leasing, should lead to a better efficiency ratio compared to the fiscal 2010 target. That being said, management will maintain expenditures necessary for effective execution of CWB's strategic plan and the year-to-date efficiency ratio is not expected to be a sustainable benchmark.
Overall credit quality is sound despite an increase in gross impaired loans and actual losses should remain within acceptable levels given the current economic environment. Based on the present view, management believes gross impaired loans will peak within the current fiscal year. The Bank intends to continue to build market share while maintaining its focus on high quality loans that offer a fair and profitable return on investment. While there are still many challenges and global uncertainties, economic fundamentals in Canada appear to be improving and all companies in the Canadian Western Bank Group are well positioned to capitalize on opportunities in this regard. The overall outlook for 2010 and beyond is positive.
This management's discussion and analysis is dated June 3, 2010.
Taxable Equivalent Basis (teb)
Most banks analyze revenue on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other banks. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.
Non-GAAP Measures
Taxable equivalent basis, diluted cash earnings per common share, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, tangible common equity to risk-weighted assets, Tier 1 and total capital adequacy ratios, average balances, claims loss ratio, expense ratio and combined ratio do not have standardized meanings prescribed by 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;
- diluted cash earnings per common share - diluted earnings per common
share excluding the amortization of acquisition-related intangible
assets;
- return on common shareholders' equity - net income less preferred
share dividends divided by average shareholder's equity;
- return on assets - net income less preferred share dividends divided
by average total assets;
- efficiency ratio - non-interest expenses divided by total revenues
(net interest income plus other income);
- net interest margin - net interest income divided by average total
assets;
- tangible common equity to risk-weighted assets - shareholders' equity
less subsidiary goodwill divided by risk-weighted assets, calculated
in accordance with guidelines issued by the Office of the
Superintendent of Financial Institutions Canada (OSFI);
- Tier 1 and total capital adequacy ratios - in accordance with
guidelines issued by OSFI;
- average balances - average daily balances;
- claims loss ratio - net insurance claims and adjustment expenses as a
percentage of net earned premiums;
- expense ratio - policy acquisition costs and non-interest expenses
net of commissions and processing fees as a percentage of net earned
premiums; and
- combined ratio - sum of the claims loss and expense ratios.
Forward-looking Statements
From time to time, Canadian Western Bank (the Bank) makes written and verbal forward-looking statements. Statements of this type are included in the Annual Report and reports to shareholders and may be included in filings with Canadian securities regulators or in other communications such as press releases and corporate presentations. Forward-looking statements include, but are not limited to, statements about the Bank's objectives and strategies, targeted and expected financial results and the outlook for the Bank's businesses or for the Canadian economy. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "may increase", "may impact" and other similar expressions, or future or conditional verbs such as "will", "should", "would" and "could".
By their very nature, forward-looking statements involve numerous assumptions. A variety of factors, many of which are beyond the Bank's control, may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These factors include, but are not limited to, general business and economic conditions in Canada including the volatility and lack of liquidity in financial markets, fluctuations in interest rates and currency values, changes in monetary policy, changes in economic and political conditions, regulatory and legal developments, the level of competition in the Bank's markets, the occurrence of weather-related and other natural catastrophes, changes in accounting standards and policies, the accuracy of and completeness of information the Bank receives about customers and counterparties, the ability to attract and retain key personnel, the ability to complete and integrate acquisitions, reliance on third parties to provide components of the Bank's business infrastructure, changes in tax laws, technological developments, unexpected changes in consumer spending and saving habits, timely development and introduction of new products, and management's ability to anticipate and manage the risks associated with these factors. It is important to note that the preceding list is not exhaustive of possible factors.
These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause the Bank's actual results to differ materially from the expectations expressed in such forward looking statements. Unless required by securities law, the Bank does not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy in 2010 and how it will affect CWB's businesses are material factors the Bank considers when setting its objectives. In setting minimum performance targets for fiscal 2010, management's expectations assumed: moderate economic growth in Canada aided by positive relative performance in the four western provinces; stable or slightly higher energy and commodity prices; sound credit quality with actual losses remaining within the Bank's range of acceptable levels; modest inflationary pressures; and, an improved net interest margin resulting from lower deposit costs, a stable prime lending interest rate, favourable yields on both new lending facilities and renewed accounts, and relatively stable investment returns reflecting high quality assets held in the securities portfolio, partially offset by a reduction in the level of gains on the sale of securities compared to fiscal 2009. Through the first six months of fiscal 2010, very strong results reflect a significant recovery in net interest margin that materialized more quickly than management anticipated and a further positive impact from the February 1st acquisition of National Leasing Group Inc. Gains on sale of securities through the first two quarters were also much higher than management expected at the onset of fiscal 2010. The provision for credit losses measured as a percentage of average loans reflects higher inherent losses in the portfolio of National Leasing Group Inc. due to the nature of its business.
-------------------------------------------------------------------------
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) 2010 2010 2009 2009
-------------------------------------------------------------------------
Interest Income
Loans $ 123,830 $ 116,841 $ 107,828 15%
Securities 9,426 10,938 10,462 (10)
Deposits with
regulated financial
institutions 1,443 2,104 3,770 (62)
-------------------------------------------------------------------------
134,699 129,883 122,060 10
-------------------------------------------------------------------------
Interest Expense
Deposits 52,858 53,570 65,824 (20)
Subordinated
debentures 4,371 4,570 5,099 (14)
-------------------------------------------------------------------------
57,229 58,140 70,923 (19)
-------------------------------------------------------------------------
Net Interest Income 77,470 71,743 51,137 51
Provision for Credit
Losses (Note 6) 5,487 3,713 3,369 63
-------------------------------------------------------------------------
Net Interest Income
after Provision for
Credit Losses 71,983 68,030 47,768 51
-------------------------------------------------------------------------
Other Income
Credit related 8,496 7,278 5,321 60
Insurance, net (Note 2) 5,521 5,670 4,198 32
Trust and wealth
management services 4,499 4,470 3,869 16
Retail services 2,332 2,016 1,913 22
Gains on sale of
securities 4,072 6,497 6,580 (38)
Securitization
revenue 1,911 - - nm
Foreign exchange
gains 676 435 667 1
Other 3,333 - 22 nm
-------------------------------------------------------------------------
30,840 26,366 22,570 37
-------------------------------------------------------------------------
Net Interest and Other
Income 102,823 94,396 70,338 46
-------------------------------------------------------------------------
Non-Interest Expenses
Salaries and employee
benefits 32,681 26,390 26,587 23
Premises and equipment 7,983 7,028 6,528 22
Other expenses 8,901 6,520 6,330 41
Provincial capital
taxes 395 310 549 (28)
-------------------------------------------------------------------------
49,960 40,248 39,994 25
-------------------------------------------------------------------------
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 52,863 54,148 30,344 74
Income Taxes 14,938 14,037 8,708 72
-------------------------------------------------------------------------
37,925 40,111 21,636 75
Non-Controlling Interest
in Subsidiary 41 76 56 (27)
-------------------------------------------------------------------------
Net Income $ 37,884 $ 40,035 $ 21,580 76%
-------------------------------------------------------------------------
Preferred share
dividends (Note 9) $ 3,802 $ 3,802 $ 2,458 55%
Net income available
to common shareholders $ 34,082 $ 36,233 $ 19,122 78
-------------------------------------------------------------------------
Average number of
common shares (in
thousands) 66,144 63,925 63,503 4
Average number of
diluted common shares
(in thousands) 72,670 70,090 63,559 14
-------------------------------------------------------------------------
Earnings Per Common
Share
Basic $ 0.52 $ 0.57 $ 0.30 73
Diluted $ 0.47 $ 0.52 $ 0.30 57
-------------------------------------------------------------------------
For the six months ended
(unaudited) ------------------------ Change from
($ thousands, except April 30 April 30 April 30
per share amounts) 2010 2009 2009
------------------------------------------------------------
Interest Income
Loans $ 240,671 $ 227,096 6%
Securities 20,364 21,674 (6)
Deposits with
regulated financial
institutions 3,547 7,307 (51)
------------------------------------------------------------
264,582 256,077 3
------------------------------------------------------------
Interest Expense
Deposits 106,428 141,564 (25)
Subordinated
debentures 8,941 10,366 (14)
------------------------------------------------------------
115,369 151,930 (24)
------------------------------------------------------------
Net Interest Income 149,213 104,147 43
Provision for Credit
Losses (Note 6) 9,200 6,738 37
------------------------------------------------------------
Net Interest Income
after Provision for
Credit Losses 140,013 97,409 44
------------------------------------------------------------
Other Income
Credit related 15,774 11,064 43
Insurance, net (Note 2) 11,191 6,310 77
Trust and wealth
management services 8,969 7,782 15
Retail services 4,348 3,757 16
Gains on sale of
securities 10,569 14,723 (28)
Securitization
revenue 1,911 - nm
Foreign exchange
gains 1,111 1,222 (9)
Other 3,333 63 nm
------------------------------------------------------------
57,206 44,921 27
------------------------------------------------------------
Net Interest and Other
Income 197,219 142,330 39
------------------------------------------------------------
Non-Interest Expenses
Salaries and employee
benefits 59,071 50,424 17
Premises and equipment 15,011 12,556 20
Other expenses 15,421 12,479 24
Provincial capital
taxes 705 940 (25)
------------------------------------------------------------
90,208 76,399 18
------------------------------------------------------------
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 107,011 65,931 62
Income Taxes 28,975 18,609 56
------------------------------------------------------------
78,036 47,322 65
Non-Controlling Interest
in Subsidiary 117 123 (5)
------------------------------------------------------------
Net Income $ 77,919 $ 47,199 65%
------------------------------------------------------------
Preferred share
dividends (Note 9) $ 7,604 $ 2,458 209%
Net income available
to common shareholders $ 70,315 $ 44,741 57
------------------------------------------------------------
Average number of
common shares (in
thousands) 65,016 63,484 2
Average number of
diluted common shares
(in thousands) 71,362 63,609 12
------------------------------------------------------------
Earnings Per Common
Share
Basic $ 1.08 $ 0.70 54
Diluted $ 0.99 $ 0.70 41
------------------------------------------------------------
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) 2010 2010 2009 2009 2009
-------------------------------------------------------------------------
Assets
Cash Resources
Cash and non-
interest
bearing
deposits
with
financial
institu-
tions $ 15,343 $ 18,728 $ 17,447 $ 14,739 4%
Interest
bearing
deposits
with
regulated
financial
institutions
(Note 3) 188,705 266,158 266,980 557,313 (66)
Cheques and
other items
in transit 633 9,280 12,677 - nm
-------------------------------------------------------------------------
204,681 294,166 297,104 572,052 (64)
-------------------------------------------------------------------------
Securities
(Note 3)
Issued or
guaranteed
by Canada 508,267 930,048 854,457 585,320 (13)
Issued or
guaranteed
by a province
or munici-
pality 103,318 96,999 253,143 545,032 (81)
Other
securities 762,760 828,737 783,809 519,283 47
-------------------------------------------------------------------------
1,374,345 1,855,784 1,891,409 1,649,635 (17)
-------------------------------------------------------------------------
Securities
Purchased
Under
Resale
Agreements 247,682 20,000 - - nm
-------------------------------------------------------------------------
Loans (Notes
4 and 7)
Residential
mortgages 2,292,578 2,308,916 2,282,475 2,239,023 2
Other loans 7,650,477 7,045,834 7,029,177 6,877,594 11
-------------------------------------------------------------------------
9,943,055 9,354,750 9,311,652 9,116,617 9
-------------------------------------------------------------------------
Allowance
for credit
losses
(Note 6) (76,386) (72,570) (75,459) (75,099) 2
-------------------------------------------------------------------------
9,866,669 9,282,180 9,236,193 9,041,518 9
-------------------------------------------------------------------------
Other
Land,
buildings
and
equipment 57,859 41,248 39,252 30,369 91
Goodwill 37,191 9,360 9,360 9,360 297
Other
intangible
assets 45,618 6,152 6,465 7,089 544
Insurance
related 55,254 56,583 55,932 52,283 6
Derivative
related
(Note 8) 231 802 2,334 4,524 (95)
Other assets 114,751 75,359 97,823 83,795 37
-------------------------------------------------------------------------
310,904 189,504 211,166 187,420 66
-------------------------------------------------------------------------
Total Assets $12,004,281 $11,641,634 $11,635,872 $11,450,625 5%
-------------------------------------------------------------------------
Liabilities
and Share-
holders'
Equity
Deposits
Payable
on demand $ 530,995 $ 399,888 $ 359,176 $ 360,989 47%
Payable
after
notice 2,963,594 2,820,033 2,778,601 2,139,361 39
Payable on
a fixed
date 6,585,454 6,679,000 6,374,461 7,107,984 (7)
Deposit
from
Canadian
Western
Bank
Capital
Trust 105,000 105,000 105,000 105,000 -
-------------------------------------------------------------------------
10,185,043 10,003,921 9,617,238 9,713,334 5
-------------------------------------------------------------------------
Other
Cheques and
other items
in transit 34,565 33,498 41,964 44,039 (22)
Insurance
related 135,482 137,424 145,509 135,563 -
Derivative
related
(Note 8) 745 64 74 852 (13)
Securities
sold under
repurchase
agreements - - 300,242 83,468 nm
Other
liabilities 256,335 131,085 169,346 162,616 58
-------------------------------------------------------------------------
427,127 302,071 657,135 426,538 -
-------------------------------------------------------------------------
Subordinated
Debentures
Conventional 315,000 315,000 375,000 375,000 (16)
-------------------------------------------------------------------------
Shareholders'
Equity
Preferred
shares
(Note 9) 209,750 209,750 209,750 209,750 -
Common
shares
(Note 9) 274,223 227,716 226,480 223,062 23
Contributed
surplus 20,630 20,442 19,366 18,060 14
Retained
earnings 566,989 540,951 511,784 474,353 20
Accumulated
other
comprehensive
income 5,519 21,783 19,119 10,528 (48)
-------------------------------------------------------------------------
1,077,111 1,020,642 986,499 935,753 15
-------------------------------------------------------------------------
Total
Liabilities
and
Shareholders'
Equity
$12,004,281 $11,641,634 $11,635,872 $11,450,625 5%
-------------------------------------------------------------------------
Contingent Liabilities and Commitments (Note 11)
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
-------------------------------------------------------------------------
For the six months ended
-------------------------
(unaudited) April 30 April 30
($ thousands) 2010 2009
-------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $ 511,784 $ 448,203
Net income 77,919 47,199
Dividends - Preferred shares (7,604) (2,458)
- Common shares (14,307) (13,965)
Warrants purchased under normal course
issuer bid (Note 9) (698) -
Issuance costs on common shares (105) -
Issuance costs on preferred units - (4,626)
-------------------------------------------------------------------------
Balance at end of period 566,989 474,353
Accumulated Other Comprehensive Income
(Loss)
Balance at beginning of period 19,119 (5,203)
Other comprehensive income (13,600) 15,731
-------------------------------------------------------------------------
Balance at end of period 5,519 10,528
Total retained earnings and accumulated
other comprehensive income 572,508 484,881
Preferred Shares (Note 9)
Balance at beginning of period 209,750 -
Issued during the period - 209,750
-------------------------------------------------------------------------
Balance at end of period 209,750 209,750
Common Shares (Note 9)
Balance at beginning of period 226,480 221,914
Issued on acquisition (Note 16) 42,582 -
Issued on exercise of options 2,289 393
Issued under dividend reinvestment plan 1,563 -
Transferred from contributed surplus
on exercise or exchange of options 1,199 755
Issued on exercise of warrants 110 -
-------------------------------------------------------------------------
Balance at end of period 274,223 223,062
-------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 19,366 14,234
Amortization of fair value of options 2,463 4,581
Transferred to common shares on exercise
or exchange of options (1,199) (755)
-------------------------------------------------------------------------
Balance at end of period 20,630 18,060
-------------------------------------------------------------------------
Total Shareholders' Equity $ 1,077,111 $ 935,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
-------------------------------------------------------------------------
For the three months ended For the six months ended
--------------------------- -------------------------
(unaudited) April 30 April 30 April 30 April 30
($ thousands) 2010 2009 2010 2009
-------------------------------------------------------------------------
Net Income $ 37,884 $ 21,580 $ 77,919 $ 47,199
Other Comprehensive
Income (Loss), net
of tax
Available-for-sale
securities:
Gains (losses)
from change in
fair value(1) (13,251) 21,528 (4,617) 30,549
Reclassification
to other income(2) (2,505) (4,630) (7,414) (10,380)
-------------------------------------------------------------------------
(15,756) 16,898 (12,031) 20,169
-------------------------------------------------------------------------
Derivatives
designated as cash
flow hedges:
Gains (losses) from
change in fair
value(3) 10 2,532 17 5,968
Reclassification
to net interest
income(4) (518) (3,485) (1,586) (4,996)
Reclassification
to other liabilities
for derivatives
terminated prior
to maturity(5) - (5,410) - (5,410)
-------------------------------------------------------------------------
(508) (6,363) (1,569) (4,438)
-------------------------------------------------------------------------
(16,264) 10,535 (13,600) 15,731
-------------------------------------------------------------------------
Comprehensive Income
for the Period $ 21,620 $ 32,115 $ 64,319 $ 62,930
-------------------------------------------------------------------------
(1) Net of income tax benefit of $5,679 and $1,965 for the three and six
months ended April 30, 2010, respectively (2009 - tax expense of
$9,027 and $12,780).
(2) Net of income tax benefit of $1,074 and $3,155 for the three and six
months ended April 30, 2010, respectively (2009 - $1,950 and $4,343).
(3) Net of income tax expense of $4 and $7 for the three and six months
ended April 30, 2010, respectively (2009 - $948 and $2,497).
(4) Net of income tax benefit of $207 and $664 for the three and six
months ended April 30, 2010, respectively (2009 - $1,409 and $2,090).
(5) Net of income tax benefit of nil for the three and six months ended
April 30, 2010 (2009 - $2,264 and $2,264).
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Cash Flow
-------------------------------------------------------------------------
For the three months ended For the six months ended
--------------------------- -------------------------
(unaudited) April 30 April 30 April 30 April 30
($ thousands) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash Flows from
Operating Activities
Net income $ 37,884 $ 21,580 $ 77,919 $ 47,199
Adjustments to
determine net
cash flows:
Provision for
credit losses 5,487 3,369 9,200 6,738
Depreciation and
amortization 3,823 2,159 6,202 4,285
Amortization of
fair value of
employee stock
options 1,257 3,020 2,463 4,581
Future income
taxes, net 1,992 (2,687) 2,032 (4,312)
Gain on sale of
securities, net (4,072) (6,580) (10,569) (14,723)
Accrued interest
receivable and
payable, net 420 3,261 (12,305) 15,061
Current income
taxes payable, net 70 1,931 (14,004) (2,047)
Other items, net 47,413 15,090 54,637 7,528
-------------------------------------------------------------------------
94,274 41,143 115,575 64,310
-------------------------------------------------------------------------
Cash Flows from
Financing Activities
Deposits, net 181,123 190,237 567,806 467,615
Common shares
issued (Note 9) 2,855 333 3,962 393
Issuance costs
on share capital (105) (4,626) (105) (4,626)
Warrants purchased
under normal
course issuer
bid (Note 9) (665) - (698) -
Dividends (11,076) (9,442) (21,911) (16,423)
Long-term debt
repaid (Note 16) (270,630) - (270,630) -
Securities
sold under
repurchase
agreements, net - - (300,242) -
Debentures
redeemed - - (60,000) -
Preferred units
issued - 209,750 - 209,750
-------------------------------------------------------------------------
(98,498) 386,252 (81,818) 656,709
-------------------------------------------------------------------------
Cash Flows from
Investing Activities
Interest bearing
deposits with
regulated financial
institutions, net 76,253 (121,028) 76,375 (81,828)
Securities, purchased (648,359) (776,638) (2,029,349) (1,516,274)
Securities, sale
proceeds 964,332 361,682 2,274,063 989,576
Securities, matured 149,923 24,252 263,191 131,578
Securities purchased
under resale
agreements, net (227,682) 98,468 (247,682) 160,468
Loans, net (266,770) (51,434) (316,470) (424,187)
Land, buildings
and equipment (3,512) (1,010) (7,574) (2,115)
Business
acquisition (Note 16) (53,060) - (53,060) (6,481)
-------------------------------------------------------------------------
(8,875) (465,708) (40,506) (749,263)
-------------------------------------------------------------------------
Change in Cash and
Cash Equivalents (13,099) (38,313) (6,749) (28,244)
Cash and Cash
Equivalents at
Beginning of Period (5,490) 9,013 (11,840) (1,056)
-------------------------------------------------------------------------
Cash and Cash
Equivalents at End of
Period* $ (18,589) $ (29,300) $ (18,589) $ (29,300)
-------------------------------------------------------------------------
* Represented by:
Cash and non-interest
bearing deposits
with financial
institutions $ 15,343 $ 14,739 $ 15,343 $ 14,739
Cheques and other
items in transit
(included in Cash
Resources) 633 - 633 -
Cheques and other
items in transit
(included in Other
Liabilities) (34,565) (44,039) (34,565) (44,039)
-------------------------------------------------------------------------
Cash and Cash
Equivalents at End
of Period $ (18,589) $ (29,300) $ (18,589) $ (29,300)
-------------------------------------------------------------------------
Supplemental Disclosure
of Cash Flow Information
Amount of interest
paid in the period $ 60,027 $ 62,745 $ 138,394 $ 132,961
Amount of income
taxes paid in the
period 12,877 9,464 40,948 24,968
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements
-------------------------------------------------------------------------
(unaudited)
($ thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
These unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles (GAAP), including the accounting requirements of the
Office of the Superintendent of Financial Institutions Canada (OSFI),
using the same accounting policies as the audited consolidated
financial statements for the year ended October 31, 2009. Under
Canadian GAAP, additional disclosures are required in annual
financial statements and accordingly, these unaudited interim
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements for the year ended
October 31, 2009 as set out on pages 66 to 100 of the Bank's 2009
Annual Report.
2. Insurance Revenues, Net
Insurance revenues, net, as reported in other income on the
consolidated statement of income is presented net of net claims and
adjustment expenses and policy acquisition costs.
For the
For the three months ended six months ended
------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Net earned premiums $ 26,627 $ 27,331 $ 24,880 $ 53,958 $ 50,095
Commissions and
processing fees 546 618 760 1,164 1,414
Net claims and
adjustment expenses (15,784) (16,990) (16,126) (32,774) (34,777)
Policy acquisition
costs (5,868) (5,289) (5,316) (11,157) (10,422)
-------------------------------------------------------------------------
Total, net $ 5,521 $ 5,670 $ 4,198 $ 11,191 $ 6,310
-------------------------------------------------------------------------
3. Securities
Net unrealized gains (losses) reflected on the balance sheet follow:
As at As at As at
April 30 January 31 October 31
2010 2010 2009
-------------------------------------------------------------------------
Interest bearing deposits with regulated
financial institutions $ 3,018 $ 6,689 $ 7,390
Securities issued or guaranteed by
Canada (2,662) 901 1,594
A province or municipality 506 1,250 2,547
Other debt securities 2,913 7,231 6,898
Equity securities
Preferred shares (835) 13,009 5,810
Common shares 4,706 647 558
-------------------------------------------------------------------------
Unrealized gain, net $ 7,646 $ 29,727 $ 24,797
-------------------------------------------------------------------------
The securities portfolio is primarily comprised of high quality debt
instruments, preferred shares and common shares that are not held for
trading purposes and, where applicable, are typically held until
maturity. Fluctuations in value are generally attributed to changes
in market credit spreads, interest rates and shifts in the interest
rate curve. Unrealized losses are considered to be other than
permanent in nature.
4. Loans
The composition of the Bank's loan portfolio by geographic region and
industry sector follow:
British Saskat-
($ millions) Columbia Alberta chewan Manitoba Other Total
-------------------------------------------------------------------------
Loans to
Individuals
Residential
mortgages(2) $ 985 $ 987 $ 121 $ 84 $ 116 $ 2,293
Other loans 68 102 14 4 1 189
-------------------------------------------------------------------------
1,053 1,089 135 88 117 2,482
-------------------------------------------------------------------------
Loans to
Businesses
Commercial 808 1,321 95 86 303 2,613
Construction
and real
estate(3) 1,229 1,488 221 72 180 3,190
Equipment
financing 332 696 98 52 317 1,495
Energy - 163 - - - 163
-------------------------------------------------------------------------
2,369 3,668 414 210 800 7,461
-------------------------------------------------------------------------
Total Loans(1) $ 3,422 $ 4,757 $ 549 $ 298 $ 917 $ 9,943
-------------------------------------------------------------------------
Composition
Percentage
April 30, 2010 34% 48% 6% 3% 9% 100%
January 31,
2010 35% 50% 5% 3% 7% 100%
October 31,
2009 35% 50% 5% 3% 7% 100%
-------------------------------------------------------------------------
April 30 January 31 October 31
2010 2010 2009
Composition Composition Composition
Percentage Percentage Percentage
-----------------------------------------------
Loans to
Individuals
Residential
mortgages(2) 23% 25% 25%
Other loans 2 2 2
-----------------------------------------------
25 27 27
-----------------------------------------------
Loans to
Businesses
Commercial 26 28 27
Construction
and real
estate(3) 32 32 31
Equipment
financing 15 12 13
Energy 2 1 2
-----------------------------------------------
75 73 73
-----------------------------------------------
Total Loans(1) 100% 100% 100%
-----------------------------------------------
Composition
Percentage
April 30, 2010
January 31,
2010
October 31,
2009
-----------------------------------------------
(1) This table does not include an allocation for credit losses or
deferred revenue and premiums.
(2) Includes single- and multi-unit residential mortgages and project
(interim) mortgages on residential property.
(3) Includes commercial term mortgages and project (interim) mortgages
for non-residential property.
5. Securitization
As a result of the acquisition of National Leasing Group Inc.
(National Leasing) on February 1, 2010 (see Note 16), the Bank
participates in securitization activities. Securitization consists of
the transfer of equipment financing loans to an independent trust,
which buys the loans and issues securities to investors. The Bank's
securitizations are accounted for as a sale as the Bank surrenders
control of the transferred assets and receives consideration other
than a beneficial interest in the transferred assets.
When the Bank has an entitlement to participate in future cash flows,
the retained interests, net of estimated servicing costs, are
classified by the Bank as available-for-sale and are included in
other assets. When the Bank has received the full proceeds in cash, a
reserve for estimated credit and prepayment losses and a reserve for
future servicing costs, are included in other liabilities. The
retained interests represent the maximum exposure to losses on the
securitized assets. On a quarterly basis, the carrying value of the
retained interests in securitized assets is reviewed for impairment
on their fair value. Fair value is subject to credit, prepayment and
interest rate risks.
Gains on the sale of loans and servicing revenues are reported in
other income - securitization revenue. In determining the gain, the
carrying amount of the loans sold is allocated between the assets
sold and the retained interests based on their relative fair value at
the date of transfer. The Bank estimates fair value based on the
present value of future expected cash flows using management's best
estimates of the key assumptions - credit losses, prepayment speeds
and discount rates commensurate with the risks involved. There was no
sales activity related to securitization during the period.
The loans are sold on a fully serviced basis. Accordingly, upon each
securitization a servicing liability is recorded to recognize the
potential reduction in cash flows receivable as if an amount was paid
by the securitizor to a replacement servicer. The estimated fees that
would otherwise be payable to a replacement servicer form the basis
of determination of the fair value of the servicing liability that is
charged against the gain at the time of recognition of the sale of
securitized assets.
Cash flows received from securitization activities were as follows:
For the
three and six
months ended
April 30 2010
---------------------------------------------------------------------
Proceeds from new securitizations $ -
Cash flow received from retained interests 4,418
Losses reimbursed to securitizor (1,129)
---------------------------------------------------------------------
$ 3,289
---------------------------------------------------------------------
The following table presents information about off-balance sheet
gross impaired loans and net write-offs for securitized assets as at
April 30, 2010 and are not included in Note 6 - Allowance for Credit
Losses and Note 7 - Impaired and Past Due Loans:
Gross Write-offs,
Gross Impaired Net of
Loans Loans Recoveries(1)
---------------------------------------------------------------------
Type of Loan
Equipment financing
securitization $ 276,244 $ 1,597 $ 848
---------------------------------------------------------------------
(1) For the three and six months ended April 30, 2010.
As at April 30, 2010, key economic assumptions and the sensitivity of
the current fair value (FV) of residual cash flows to immediate 10
percent and 20 percent adverse changes in those assumptions are as
follows:
Impact on Impact on
FV of 10% FV of 20%
Key Economic Adverse Adverse
Assumptions Change Change
---------------------------------------------------------------------
Fair value of retained interests $ 10,138
Cash flow received from retained
interests 4,418 $ 442 $ 884
Annual prepayment rate 7.5% 393 785
Expected credit losses 3.27% 698 1,396
Residual cash flows discount rate 4.00% 54 107
---------------------------------------------------------------------
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 or 20 percent variation in
assumptions generally cannot be extrapolated because the relationship
of the change in assumption to the change in fair value may not be
linear. Also, in the above table, the effect of a variation in a
particular assumption on the fair value of the retained interests is
calculated without changing any other assumption. In reality, changes
in one factor may result in changes in another, which might magnify
or counteract the sensitivities.
6. Allowance for Credit Losses
The following table shows the changes in the allowance for credit
losses:
For the three months ended
April 30, 2010
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
-------------------------------------------------------------------------
Balance at beginning of period $ 13,531 $ 59,039 $ 72,570
Allowance acquired (Note 16) 2,596 4,172 6,768
Provision for credit losses 10,693 (5,206) 5,487
Write-offs (8,530) - (8,530)
Recoveries 91 - 91
-------------------------------------------------------------------------
Balance at end of period $ 18,381 $ 58,005 $ 76,386
-------------------------------------------------------------------------
For the three months ended
January 31, 2010
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
-------------------------------------------------------------------------
Balance at beginning of period $ 14,306 $ 61,153 $ 75,459
Allowance acquired (Note 16) - - -
Provision for credit losses 5,827 (2,114) 3,713
Write-offs (6,605) - (6,605)
Recoveries 3 - 3
-------------------------------------------------------------------------
Balance at end of period $ 13,531 $ 59,039 $ 72,570
-------------------------------------------------------------------------
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 six months ended
April 30, 2010
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
-------------------------------------------------------------------------
Balance at beginning of period $ 14,306 $ 61,153 $ 75,459
Allowance acquired (Note 16) 2,596 4,172 6,768
Provision for credit losses 16,520 (7,320) 9,200
Write-offs (15,135) - (15,135)
Recoveries 94 - 94
Balance at end of period $ 18,381 $ 58,005 $ 76,386
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
Allowance acquired (Note 16) - - -
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
-------------------------------------------------------------------------
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, 2010
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,618,061 $ 19,746 $ 1,722 $ 18,024
Real estate(1) 4,077,489 101,228 5,884 95,344
Equipment
financing 1,629,344 21,322 4,897 16,425
Commercial 2,618,161 24,933 5,878 19,055
---------------------------------------------------------------------
Total(2) $ 9,943,055 $ 167,229 $ 18,381 148,848
--------------------------------------------------------
General
allowance(3) (58,005)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ 90,843
---------------------------------------------------------------------
As at January 31, 2010
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,533,375 $ 19,128 $ 1,115 $ 18,013
Real estate(1) 3,944,058 79,143 3,220 75,923
Equipment
financing 1,284,931 18,233 2,954 15,279
Commercial 2,592,386 29,898 6,242 23,656
---------------------------------------------------------------------
Total(2) $ 9,354,750 $ 146,402 $ 13,531 132,871
--------------------------------------------------------
General
allowance(3) (59,039)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ 73,832
---------------------------------------------------------------------
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,452,682 $ 14,805 $ 1,207 $ 13,598
Real estate(1) 3,909,991 76,643 5,611 71,032
Equipment
financing 1,412,344 26,408 6,196 20,212
Commercial 2,536,635 20,088 1,292 18,796
---------------------------------------------------------------------
Total(2) $ 9,311,652 $ 137,944 $ 14,306 123,638
--------------------------------------------------------
General
allowance(3) (61,153)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ 62,485
---------------------------------------------------------------------
(1) Multi-family residential mortgages are included in real estate loans.
(2) Gross impaired loans includes foreclosed assets with a carrying value
of $695 (January 31, 2010 - $nil and October 31, 2009 - $nil) which
are held for sale.
(3) The general allowance for credit risk is not allocated by loan type.
Outstanding impaired loans, net of allowance for credit losses, by
provincial location of security, are as follows:
As at April 30, 2010
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 111,487 $ 12,943 $ 98,544
British Columbia 32,260 2,379 29,881
Saskatchewan 2,002 933 1,069
Manitoba 749 210 539
Other(1) 20,731 1,916 18,815
---------------------------------------------------------------------
Total $ 167,229 $ 18,381 148,848
--------------------------------------------------------
General allowance(2) (58,005)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 90,843
---------------------------------------------------------------------
As at January 31, 2010
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 80,478 $ 4,854 $ 75,624
British Columbia 33,623 2,058 31,565
Saskatchewan 1,570 645 925
Manitoba 684 29 655
Other(1) 30,047 5,945 24,102
---------------------------------------------------------------------
Total $ 146,402 $ 13,531 132,871
--------------------------------------------------------
General allowance(2) (59,039)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 73,832
---------------------------------------------------------------------
As at October 31, 2009
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 74,847 $ 7,651 $ 67,196
British Columbia 37,655 5,000 32,655
Saskatchewan 1,632 609 1,023
Manitoba 337 23 314
Other(1) 23,473 1,023 22,450
---------------------------------------------------------------------
Total $ 137,944 $ 14,306 123,638
--------------------------------------------------------
General allowance(2) (61,153)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 62,485
---------------------------------------------------------------------
(1) Included in Other is a corporate loan with security that is not
identifiable to a specific province.
(2) The general allowance for credit risk is not allocated by
province.
During the three and six months ended April 30, 2010, interest
recognized as income on impaired loans totaled $950 and $1,604,
respectively (2009 - $726 and $932).
Gross impaired loans exclude certain past due loans where payment of
interest or principal is contractually in arrears, which are not
classified as impaired. Details of such past due loans that have not
been included in the gross impaired amount are as follows:
As at April 30, 2010
-----------------------------------------------------
1 - 30 31 - 60 61 - 90 More than
days days days 90 days Total
---------------------------------------------------------------------
Residential
mortgages $ 8,173 $ 3,003 $ 346 $ 456 $ 11,978
Other loans 35,379 2,087 138 - 37,604
---------------------------------------------------------------------
$ 43,552 $ 5,090 $ 484 $ 456 $ 49,582
---------------------------------------------------------------------
Total as at
January 31,
2010 $ 30,128 $ 20,367 $ 3,313 $ 1,165 $ 54,973
---------------------------------------------------------------------
Total as at
October 31,
2009 $ 27,533 $ 29,272 $ 4,694 $ - $ 61,499
---------------------------------------------------------------------
8. Derivative Financial Instruments For the three and six months ended
April 30, 2010, a net unrealized after tax gain of $10 and $17
respectively (2009 - $2,532 and $5,968) was recorded in other
comprehensive income for changes in fair value of the effective
portion of derivatives designated as cash flow hedges, and $nil (2009
- $nil) was recorded in other income for changes in fair value of the
ineffective portion of derivatives classified as cash flow hedges.
Amounts accumulated in other comprehensive income are reclassified to
net income in the same period that interest on certain floating rate
loans (i.e. the hedged items) affect income. For the three and six
months ended April 30, 2010, a net gain after tax of $518 and $1,586
respectively (2009 - $3,485 and $4,996) was reclassified to net
income. A net gain of $31 (2009 - $4,155) after tax recorded in
accumulated other comprehensive income as at April 30, 2010 is
expected to be reclassified to net income in the next twelve months
and will offset variable cash flows from floating rate loans.
The Bank designates certain derivative financial instruments as
either a hedge of the fair value of recognized assets or liabilities
or firm commitments (fair value hedges), or a hedge of highly
probable future cash flows attributable to a recognized asset or
liability or a forecasted transaction (cash flow hedges). On an
ongoing basis, the Bank assesses whether the derivatives that are
used in hedging transactions are effective in offsetting changes in
fair values or cash flows of the hedged items. If a hedging
transaction becomes ineffective or if the derivative is not
designated as a cash flow hedge, any subsequent change in the fair
value of the hedging instrument is recognized in earnings. Prior to
February 1, 2010, all interest rate swaps were designated as cash
flow hedges. Subsequent to February 1, 2010 with the acquisition of
National Leasing (see Note 16), the Bank also has interest rate swaps
not designated as hedges.
The following table shows the notional value outstanding for
derivative financial instruments and the related fair value:
As at April 30, 2010
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges(1) $ 25,000 $ 39 $ -
Interest rate swaps not
designated as hedges(2) 60,910 - 687
Equity contracts(3) 500 3 -
Foreign exchange contracts(4) 49,004 189 54
Embedded derivatives in
equity-linked deposits(3) n/a 4
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 231 $ 745
---------------------------------------------------------------------
As at January 31, 2010
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges(1) $ 145,000 $ 748 $ -
Interest rate swaps not
designated as hedges(2) - - -
Equity contracts(3) 2,000 - 12
Foreign exchange contracts(4) 5,463 52 52
Embedded derivatives in
equity-linked deposits(3) n/a 2 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 802 $ 64
---------------------------------------------------------------------
As at October 31, 2009
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges $ 235,000 $ 2,265 $ -
Interest rate swaps not
designated as hedges - - -
Equity contracts 2,000 - 33
Foreign exchange contracts 2,496 44 41
Embedded derivatives in
equity-linked deposits n/a 25 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 2,334 $ 74
---------------------------------------------------------------------
(1) Interest rate swaps designated as cash flow hedges outstanding at
April 30, 2010 mature between May and June 2010.
(2) Interest rate swaps not designated as hedges outstanding at April
30, 2010 mature between August 2010 and April 2014.
(3) Equity contract and equity-linked deposits outstanding at April
30, 2010 mature March 2011.
(4) Foreign exchange contracts outstanding at April 30, 2010 mature
between May 2010 and January 2011.
n/a - not applicable.
There were no forecasted transactions that failed to occur during the
three and six months ended April 30, 2010.
9. Capital Stock
Share Capital
For the six months ended
---------------------------------------------------
April 30, 2010 April 30, 2009
---------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------------------------------------------------------------------
Preferred Shares
- Series 3
Outstanding at
beginning of
period 8,390,000 $ 209,750 - $ -
Issued during
the period - - 8,390,000 209,750
---------------------------------------------------------------------
Outstanding at
end of period(1) 8,390,000 209,750 8,390,000 209,750
---------------------------------------------------------------------
Common Shares
Outstanding at
beginning of
period 63,903,460 226,480 63,457,142 221,914
Issued on
acquisition
(Note 16) 2,065,088 42,582 - -
Issued under
dividend
reinvestment
plan(2) 69,922 1,563 - -
Issued on
exercise or
exchange of
options 262,801 2,289 131,378 393
Issued on
exercise of
warrants 7,868 110 - -
Transferred from
contributed
surplus on
exercise or
exchange of
options - 1,199 - 755
---------------------------------------------------------------------
Outstanding at
end of period 66,309,139 274,223 63,588,520 223,062
---------------------------------------------------------------------
Share Capital $ 483,973 $ 432,812
---------------------------------------------------------------------
(1) Holders of the Preferred Shares - Series 3 are entitled to
receive non-cumulative quarterly fixed dividends for the initial
five-year period ending April 30, 2014 of 7.25% per annum,
payable quarterly, as and when declared. For further information
on dividend rates after April 30, 2014, refer to Note 18 of the
audited consolidated financial statements for the year ended
October 31, 2009 (see page 85 of the 2009 Annual Report).
(2) During the quarter, shares were issued at a 2% discount from the
average closing price of the five trading days preceding the
dividend payment date.
Warrants to Purchase Common Shares
For the six months ended
-------------------------
April 30 April 30
Number of Warrants 2010 2009
---------------------------------------------------------------------
Outstanding at beginning of period 14,964,356 -
Issued - 14,964,980
Purchased and cancelled (72,928) -
Exercised (7,868) -
---------------------------------------------------------------------
Outstanding at end of period 14,883,560 14,964,980
---------------------------------------------------------------------
On January 18, 2010, the Bank received approval from the Toronto
Stock Exchange to institute a Normal Course Issuer Bid (NCIB) to
purchase and cancel up to 748,058 of its warrants. The NCIB commenced
January 20, 2010 and will expire January 19, 2011. For the three and
six months ended April 30, 2010 the Bank purchased and cancelled
68,428 and 72,928 warrants at an aggregate cost of $665 and $698,
respectively, which was charged to retained earnings.
10. Stock-Based Compensation
Stock Options
For the three months ended
---------------------------------------------------
April 30, 2010 April 30, 2009
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------------------------------------------------------------
Options
Balance at
beginning of
period 4,667,731 $ 18.98 6,173,917 $ 19.41
Granted - - 16,500 8.58
Exercised or
exchanged (397,800) 15.38 (445,000) 10.06
Forfeited (26,310) 20.21 (1,301,162) 27.12
---------------------------------------------------------------------
Balance at end
of period 4,243,621 $ 19.31 4,444,255 $ 18.05
---------------------------------------------------------------------
For the six months ended
---------------------------------------------------
April 30, 2010 April 30, 2009
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------------------------------------------------------------
Options
Balance at
beginning of
period 4,394,605 $ 18.65 5,204,882 $ 20.83
Granted 358,291 22.09 1,006,535 11.71
Exercised or
exchanged (453,300) 15.19 (466,000) 10.06
Forfeited (55,975) 18.98 (1,301,162) 27.12
---------------------------------------------------------------------
Balance at end
of period 4,243,621 $ 19.31 4,444,255 $ 18.05
---------------------------------------------------------------------
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 453,300
options (2009 - 466,000) exercised or exchanged in the six months
ended April 30, 2010, option holders exchanged the rights to 304,300
options (2009 - 432,000) and received 113,801 shares (2009 - 97,378)
in return under the cashless settlement alternative.
For the six months ended April 30, 2010, salary expense of $2,463
(2009 - $4,581) was recognized relating to the estimated fair value
of options. The fair value of options granted was estimated using a
binomial option pricing model with the following variables and
assumptions: (i) risk-free interest rate of 2.6% (2009 - 2.1%), (ii)
expected option life of 4.0 years (2009 - 4.0 years), (iii) expected
volatility of 44% (2009 - 35%), and (iv) expected dividends of 2.0%
(2009 - 4.0%). The weighted average fair value of options granted was
estimated at $7.16 (2009 - $1.91) per share.
Further details relating to stock options outstanding and exercisable
at April 30, 2010 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 $13.78 1,002,135 3.5 $ 11.79 40,400 $ 13.78
$16.38 to $17.58 950,900 2.1 16.67 510,700 16.48
$19.16 to $21.46 1,045,490 1.7 21.45 735,700 21.45
$22.09 to $26.38 1,026,316 3.1 24.40 294,200 24.95
$28.11 to $31.18 218,780 2.6 31.13 - -
-------------------------------------------------------------------------
Total 4,243,621 2.6 $ 19.31 1,581,000 $ 20.30
-------------------------------------------------------------------------
Restricted Share Units
Under the Restricted Share Unit (RSU) plan, certain employees are
eligible to receive an award in the form of RSUs. Each RSU entitles
the holder to receive the cash equivalent of the market value of the
Bank's common shares at the vesting date and an amount equivalent to
the dividends paid on the common shares during the vesting period.
RSUs vest on each anniversary of the grant in equal one-third
installments over a vesting period of three years. Salary expense is
recognized evenly over the vesting period, except where the employee
is eligible to retire prior to the vesting date, in which case the
expense is recognized between the grant date and the date the
employee is eligible to retire.
For the six months ended April 30, 2010, salary expense of $1,670 was
recognized related to RSUs (2009 - nil). As at April 30, 2010, the
liability for the RSUs held under this plan was $5,655 (2009 - nil).
At the end of each period, the liability and salary expense are
adjusted to reflect changes in the market value of the Bank's common
shares. As at April 30, 2010, 292,448 RSUs were outstanding (2009 -
nil).
Deferred Share Units
During the quarter, the Bank adopted a plan to grant Deferred Share
Units (DSUs) by linking a portion of annual director compensation to
the future value of the Bank's common shares. Under this plan,
directors will receive at least 50% of their annual retainer in DSUs.
The DSUs are not redeemable by the director until termination or
retirement and must be redeemed for cash. Common share dividend
equivalents accrue to the directors in the form of additional units.
As at April 30, 2010, 23,838 DSUs were outstanding (2009 - nil)
The expense related to the DSUs is recorded in the period the award
is earned by the director. For the three and six months ended April
30, 2010, non-interest expense "other expenses" included $40 related
to DSUs (2009 - nil). As at April 30, 2010, the liability for DSUs
was $572 (2009 - nil). At the end of each period, the liability and
expense are adjusted to reflect changes in the market value of the
Bank's common shares.
11. Contingent Liabilities and Commitments
Significant contingent liabilities and commitments, including
guarantees provided to third parties, are discussed in Note 20 of the
Bank's audited consolidated financial statements for the year ended
October 31, 2009 (see page 88 of the 2009 Annual Report) and include:
As at As at As at
April 30 January 31 October 31
2010 2010 2009
---------------------------------------------------------------------
Guarantees and standby
letters of credit
Balance outstanding $ 214,144 $ 187,786 $ 196,380
Business credit cards
Total approved limit 12,660 11,025 10,496
Balance outstanding 2,772 2,794 2,566
---------------------------------------------------------------------
In the ordinary course of business, the Bank and its subsidiaries are
party to legal proceedings. Based on current knowledge, management
does not expect the outcome of any of these proceedings to have a
material effect on the consolidated financial position or results of
operations.
12. Financial Instruments
As a financial institution, most of the Bank's balance sheet is
comprised of financial instruments and the majority of net income
results from gains, losses, income and expenses related to the same.
Financial instrument assets include cash resources, securities,
securities purchased under resale agreements, loans and derivative
financial instruments. Financial instrument liabilities include
deposits, securities sold under repurchase agreements, derivative
financial instruments and subordinated debentures.
The use of financial instruments exposes the Bank to credit,
liquidity and market risk. A discussion of how these and other risks
are managed can be found in the 2009 consolidated annual financial
statements.
The value of financial assets recorded on the consolidated balance
sheets at April 30, 2010 at fair value (cash, securities, securities
purchased under resale agreements and derivatives) was determined
using published market prices quoted in active markets for 81% (2009
- 95%) of the portfolio and estimated using a valuation technique
based on observable market data for 19% (2009 - 5%) of the portfolio.
The value of liabilities recorded on the consolidated balance sheet
at fair value (derivatives and securities sold under repurchase
agreements) was determined using a valuation technique based on
observable market data. There were no financial instruments that were
measured using unobservable market data.
The table below sets out the fair values of financial instruments
(including certain derivatives) using the valuation methods and
assumptions outlined in the 2009 consolidated annual financial
statements. The table does not include assets and liabilities that
are not considered financial instruments.
April 30, 2010
---------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 204,681 $ 204,681 $ -
Securities 1,374,345 1,374,345 -
Securities purchased under
resale agreements 247,682 247,682 -
Loans(1) 9,912,915 9,899,359 (13,556)
Other assets(2) 116,859 116,859 -
Derivative related 231 231 -
Liabilities
Deposits(1) 10,197,758 10,222,742 24,984
Other liabilities(3) 292,948 292,948 -
Securities sold under
repurchase agreements - - -
Subordinated debentures 315,000 314,197 (803)
Derivative related 745 745 -
---------------------------------------------------------------------
October 31, 2009
---------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 297,104 $ 297,104 $ -
Securities 1,891,409 1,891,409 -
Securities purchased under
resale agreements - - -
Loans(1) 9,320,749 9,368,074 47,325
Other assets(2) 97,179 97,179 -
Derivative related 2,334 2,334 -
Liabilities
Deposits(1) 9,628,949 9,739,360 110,411
Other liabilities(3) 265,295 265,295 -
Securities sold under
repurchase agreements 300,242 300,242 -
Subordinated debentures 375,000 377,363 2,363
Derivative related 74 74 -
---------------------------------------------------------------------
(1) Loans and deposits exclude deferred premiums and deferred
revenue, which are not financial instruments.
(2) Other assets exclude land, buildings and equipment, goodwill and
other intangible assets, reinsurers' share of unpaid claims and
adjustment expenses, future income tax asset, prepaid and
deferred expenses, financing costs and other items that are not
financial instruments.
(3) Other liabilities exclude future income tax liability, deferred
revenue, unearned insurance premiums and other items that are not
financial instruments.
(4) For further information on interest rates associated with
financial assets and liabilities, including derivative
instruments, refer to Note 13.
13. Interest Rate Sensitivity
The Bank's exposure to interest rate risk as a result of a difference
or gap between the maturity or repricing behavior of interest
sensitive assets and liabilities, including derivative financial
instruments, is discussed in Note 28 of the audited consolidated
financial statements for the year ended October 31, 2009 (see page 93
of the 2009 Annual Report). The following table shows the gap
position for selected time intervals.
Asset Liability Gap Positions
Floating
Rate and Total
Within 1 1 to 3 3 Months Within 1
($ millions) Month Months to 1 Year Year
---------------------------------------------------------------------
April 30, 2010
Assets
Cash resources
and securities $ 111 $ 69 $ 366 $ 546
Loans 4,944 584 1,043 6,571
Other assets - - - -
Derivative financial
instruments(1) - 80 - 80
---------------------------------------------------------------------
Total 5,055 733 1,409 7,197
---------------------------------------------------------------------
Liabilities
and Equity
Deposits 4,090 631 2,267 6,988
Other liabilities 3 6 25 34
Debentures - - 70 70
Shareholders'
equity - - - -
Derivative financial
instruments(1) - 80 - 80
---------------------------------------------------------------------
Total $ 4,093 $ 717 $ 2,362 $ 7,172
---------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 962 $ 16 $ (953) $ 25
---------------------------------------------------------------------
Cumulative Gap $ 962 $ 978 $ 25 $ 25
---------------------------------------------------------------------
Cumulative Gap as
a percentage of
total assets 7.9% 8.0% 0.2% 0.2%
---------------------------------------------------------------------
January 31, 2010
Cumulative gap $ 693 $ 591 $ 265 $ 265
---------------------------------------------------------------------
Cumulative gap as
a Percentage of
total assets 5.9% 5.0% 2.2% 2.2%
---------------------------------------------------------------------
October 31, 2009
Cumulative gap $ 486 $ 275 $ 208 $ 208
---------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 4.1% 2.3% 1.8% 1.8%
---------------------------------------------------------------------
Non-
1 year to More than interest
($ millions) 5 years 5 years Sensitive Total
---------------------------------------------------------------------
April 30, 2010
Assets
Cash resources
and securities $ 921 $ 107 $ 5 $ 1,579
Loans 3,486 96 (39) 10,114
Other assets - - 311 311
Derivative financial
instruments(1) 55 - - 135
---------------------------------------------------------------------
Total 4,462 203 277 12,139
---------------------------------------------------------------------
Liabilities
and Equity
Deposits 3,124 105 (32) 10,185
Other liabilities 34 8 351 427
Debentures 170 75 - 315
Shareholders'
equity - - 1,077 1,077
Derivative financial
instruments(1) 55 - - 135
---------------------------------------------------------------------
Total $ 3,383 $ 188 $ 1,396 $ 12,139
---------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 1,079 $ 15 $ (1,119) $ -
---------------------------------------------------------------------
Cumulative Gap $ 1,104 $ 1,119 $ - $ -
---------------------------------------------------------------------
Cumulative Gap as
a percentage of
total assets 9.0% 9.1% -% -%
---------------------------------------------------------------------
January 31, 2010
Cumulative gap $ 1,048 $ 1,052 $ - $ -
---------------------------------------------------------------------
Cumulative gap as
a Percentage of
total assets 8.9% 8.9% -% -%
---------------------------------------------------------------------
October 31, 2009
Cumulative gap $ 1,052 $ 1,073 $ - $ -
---------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 8.9% 9.0% -% -%
---------------------------------------------------------------------
(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, 2010 Month Months to 1 Year Year
---------------------------------------------------------------------
Total assets 3.5% 2.8% 4.6% 3.6%
Total liabilities 0.6 1.7 2.9 1.4
---------------------------------------------------------------------
Interest rate
sensitive gap 2.9% 1.1% 1.7% 2.2%
---------------------------------------------------------------------
January 31, 2010
---------------------------------------------------------------------
Total assets 3.8% 2.8% 3.9% 3.7%
Total liabilities 0.7 1.9 2.9 1.4
---------------------------------------------------------------------
Interest rate
sensitive gap 3.1% 0.9% 1.0% 2.3%
---------------------------------------------------------------------
October 31, 2009
---------------------------------------------------------------------
Total assets 3.8% 2.6% 4.5% 3.8%
Total liabilities 0.7 2.4 3.1 1.4
---------------------------------------------------------------------
Interest rate
sensitive gap 3.1% 0.2% 1.4% 2.4%
---------------------------------------------------------------------
1 Year to More than
April 30, 2010 5 Years 5 Years Total
--------------------------------------------------------
Total assets 5.5% 4.3% 4.3%
Total liabilities 3.2 5.8 2.0
--------------------------------------------------------
Interest rate
sensitive gap 2.3% (1.5)% 2.3%
--------------------------------------------------------
January 31, 2010
--------------------------------------------------------
Total assets 5.0% 5.0% 4.2%
Total liabilities 3.4 5.7 2.2
--------------------------------------------------------
Interest rate
sensitive gap 1.6% (0.7)% 2.0%
--------------------------------------------------------
October 31, 2009
--------------------------------------------------------
Total assets 4.9% 5.8% 4.3%
Total liabilities 3.6 5.8 2.3
--------------------------------------------------------
Interest rate
sensitive gap 1.3% -% 2.0%
--------------------------------------------------------
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 0.4% or $1,132 (October 31, 2009
- 2.5 % or $6,574 decrease to net interest income) and decrease other
comprehensive income $12,066 (October 31, 2009 - $21,355) net of tax,
respectively over the following twelve months. A one-percentage point
decrease in all interest rates would increase net interest income by
approximately 1.9% or $5,364 (October 31, 2009 - 3.8% or $10,241) and
increase other comprehensive income $12,066 (October 31, 2009 -
$21,355) net of tax.
14. Segmented Information
The Bank operates principally in two industry segments - banking and
trust, and insurance. These two segments differ in products and
services but are both based within Western Canada. The banking and
trust segment provides comprehensive banking services, including
equipment loans and leases from National Leasing, as well as trust
and wealth management services for individuals, businesses and
institutional clients. 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
2010 2010 2009
---------------------------------------------------------------------
Net interest income (teb)(1) $ 78,436 $ 72,619 $ 51,399
Less teb adjustment 2,448 2,379 1,528
---------------------------------------------------------------------
Net interest income per
financial statements 75,988 70,240 49,871
Other income(2) 24,951 20,616 18,125
---------------------------------------------------------------------
Total revenues 100,939 90,856 67,996
Provision for credit losses 5,487 3,713 3,369
Non-interest expenses 47,129 37,627 37,381
Provision for income taxes 13,797 12,750 7,785
Non-controlling interest
in subsidiary 41 76 56
---------------------------------------------------------------------
Net income $ 34,485 $ 36,690 $ 19,405
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 11,688 $ 11,317 $ 11,024
---------------------------------------------------------------------
Insurance
--------------------------------------
Three months ended
--------------------------------------
April 30 January 31 April 30
2010 2010 2009
---------------------------------------------------------------------
Net interest income (teb)(1) $ 1,696 $ 1,687 $ 1,413
Less teb adjustment 214 184 147
---------------------------------------------------------------------
Net interest income per
financial statements 1,482 1,503 1,266
Other income(2) 5,889 5,750 4,445
---------------------------------------------------------------------
Total revenues 7,371 7,253 5,711
Provision for credit losses - - -
Non-interest expenses 2,831 2,621 2,613
Provision for income taxes 1,141 1,287 923
Non-controlling interest
in subsidiary - - -
---------------------------------------------------------------------
Net income $ 3,399 $ 3,345 $ 2,175
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 210 $ 214 $ 192
---------------------------------------------------------------------
Total
--------------------------------------
Three months ended
--------------------------------------
April 30 January 31 April 30
2010 2010 2009
---------------------------------------------------------------------
Net interest income (teb)(1) $ 80,132 $ 74,306 $ 52,812
Less teb adjustment 2,662 2,563 1,675
---------------------------------------------------------------------
Net interest income per
financial statements 77,470 71,743 51,137
Other income 30,840 26,366 22,570
---------------------------------------------------------------------
Total revenues 108,310 98,109 73,707
Provision for credit losses 5,487 3,713 3,369
Non-interest expenses 49,960 40,248 39,994
Provision for income taxes 14,938 14,037 8,708
Non-controlling interest
in subsidiary 41 76 56
---------------------------------------------------------------------
Net income $ 37,884 $ 40,035 $ 21,580
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 11,898 $ 11,531 $ 11,216
---------------------------------------------------------------------
Banking and Trust Insurance
--------------------------------------------
Six months ended Six months ended
-------------------------------------------------------------------------
April 30 April 30 April 30 April 30
2010 2009 2010 2009
-------------------------------------------------------------------------
Net interest income (teb)(1) $ 151,055 $ 104,500 $ 3,383 $ 2,908
Less teb adjustment 4,827 2,966 398 295
-------------------------------------------------------------------------
Net interest income per
financial statements 146,228 101,534 2,985 2,613
Other income 45,567 38,343 11,639 6,578
-------------------------------------------------------------------------
Total revenues 191,795 139,877 14,624 9,191
Provision for credit losses 9,200 6,738 - -
Non-interest expenses 84,756 71,291 5,452 5,108
Provision for income taxes 26,547 17,498 2,428 1,111
Non-controlling interest
in subsidiary 117 123 - -
-------------------------------------------------------------------------
Net income $ 71,175 $ 44,227 $ 6,744 $ 2,972
-------------------------------------------------------------------------
Total average assets
($ millions)(3) $ 11,502 $ 10,867 $ 212 $ 190
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
----------------------
Six months ended
---------------------------------------------------
April 30 April 30
2010 2009
---------------------------------------------------
Net interest income (teb)(1) $ 154,438 $ 107,408
Less teb adjustment 5,225 3,261
---------------------------------------------------
Net interest income per
financial statements 149,213 104,147
Other income 57,206 44,921
---------------------------------------------------
Total revenues 206,419 149,068
Provision for credit losses 9,200 6,738
Non-interest expenses 90,208 76,399
Provision for income taxes 28,975 18,609
Non-controlling interest
in subsidiary 117 123
---------------------------------------------------
Net income $ 77,919 47,199
---------------------------------------------------
Total average assets
($ millions)(3) $ 11,714 $ 11,057
---------------------------------------------------
---------------------------------------------------
(1) Taxable Equivalent Basis (teb) - Most financial institutions analyze
revenue on a taxable equivalent basis to permit uniform measurement
and comparison of net interest income. Net interest income (as
presented in the consolidated statement of income) includes tax-
exempt income on certain securities. Since this income is not
taxable, the rate of interest or dividends received is significantly
lower than would apply to a loan or security of the same amount. The
adjustment to taxable equivalent basis increases interest income and
the provision for income taxes to what they would have been had the
tax-exempt securities been taxed at the statutory rate. The taxable
equivalent basis does not have a standardized meaning prescribed by
generally accepted accounting principles and therefore may not be
comparable to similar measures presented by other financial
institutions.
(2) Other income for the insurance segment is presented net of net
claims, adjustment expenses and policy acquisition expenses and
includes gains on sale of securities.
(3) Assets are disclosed on an average daily balance basis as this
measure is most relevant to a financial institution and is the
measure reviewed by management.
15. Capital Management
Capital for Canadian financial institutions is managed and reported
in accordance with a capital management framework specified by OSFI
commonly called Basel II.
Capital funds are managed in accordance with policies and plans that
are regularly reviewed and approved by the Board of Directors and
take into account forecasted capital needs and markets. The goal is
to maintain adequate regulatory capital to be considered well
capitalized, protect customer deposits and provide capacity for
internally generated growth and strategic opportunities that do not
otherwise require accessing the public capital markets, all while
providing a satisfactory return for shareholders. Additional
information about the Bank's capital management practices is provided
in Note 31 to the 2009 audited financial statements beginning on page
97 of the 2009 Annual Report.
Capital Structure and Regulatory Ratios
As at As at As at
April 30 January 31 October 31
2010 2010 2009
---------------------------------------------------------------------
Capital
Tier 1 $ 1,128,608 $ 1,094,841 $ 1,063,287
Total 1,434,081 1,420,842 1,449,790
---------------------------------------------------------------------
Capital ratios
Tier 1 11.4% 11.6% 11.3%
Total 14.5 15.1 15.4
Assets to capital multiple 8.4 x 8.2 x 8.1 x
---------------------------------------------------------------------
During the three and six months ended April 30, 2010, the Bank
complied with all internal and external capital requirements.
16. Business Acquisition
On February 1, 2010, the Bank acquired 100% of the outstanding common
shares of National Leasing in exchange for $52,826 in cash, 2,065,088
common shares of the Bank ($42,582) and contingent consideration for
a total acquisition cost of $126,512. Both the Bank and the vendors
have the option to trigger the payment of the contingent
consideration no earlier than November 1, 2012. A portion of the
contingent consideration is not yet determinable and will be
recognized as an adjustment to goodwill in the period in which the
contingency is resolved.
National Leasing is a commercial equipment leasing company for small
to mid-size transactions. National Leasing is headquartered in
Winnipeg, Manitoba, and has over 58,000 lease agreements with a
collective book value of approximately $658,000, including
securitized leases which comprise approximately one half of the
portfolio.
Details of the fair values of assets and liabilities acquired are as
follows:
Assets and Liabilities Acquired at Fair Values
------------------------------------------------------
Loans $ 341,621
Intangible assets 40,708
Goodwill 27,831
Long-term debt (270,630)
Future income tax liabilities (10,611)
Other items, net (2,407)
------------------------------------------------------
Net assets acquired $ 126,512
------------------------------------------------------
Intangible assets include customer relationships, computer software,
non-competition agreements, lease administration contracts and
trademarks. The trademark, which has an estimated value of $1,610, is
not subject to amortization. National Leasing'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. The long-term debt was repaid immediately after the
acquisition.
17. Assets Under Administration and Management
Assets under administration of $8,223,274 (October 31, 2009 -
$5,467,447) and assets under management of $779,721 (October 31, 2009
- $878,095) represent the fair value of trust assets held for
personal, corporate and institutional clients and leases under
administration. The assets are kept separate from the Bank's own
assets. Assets under administration and management are not reflected
in the consolidated balance sheets and relate to the banking and
trust segment.
18. Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable
entities to International Financial Reporting Standards (IFRS). The
Bank's consolidated financial statements will be prepared in
accordance with IFRS for the fiscal year commencing November 1, 2011
and will include comparative information for the prior year.
During 2008, the Bank commenced a four stage project to identify and
evaluate the impact of the transition to IFRS on the consolidated
financial statements and develop a plan to complete the transition.
The project plan includes the following phases - diagnostic, design
and planning, solution development, and implementation. The
diagnostic and the design and planning phases are complete, and the
solution development phase is expected to be completed by the end of
fiscal 2010.
The impact of the transition to IFRS on the Bank's consolidated
financial statements for current standards is not yet determinable.
CWB continues to monitor the International Accounting Standards
Board's proposed changes to standards during Canada's transition to
IFRS. These proposed changes may have a significant impact on the
Bank's implementation plan and future financial statements.
-------------------------------------------------------------------------
Shareholder Information
-------------------------------------------------------------------------
Head Office Transfer Agent and Registrar
Canadian Western Bank & Trust Valiant Trust Company
Suite 3000, Canadian Western Suite 310, 606 - 4th Street S.W.
Bank Place Calgary, AB T2P 1T1
10303 Jasper Avenue Telephone: (403) 233-2801
Edmonton, AB T5J 3X6 Fax: (403) 233-2857
Telephone: (780) 423-8888 Website: www.valianttrust.com
Fax: (780) 423-8897 E-mail: [email protected]
Website: www.cwbankgroup.com
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 to
Vancouver, BC V6B 0A2 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 Dividend Reinvestment Plan
Incorporated
Suite 600, 750 Cambie Street CWB's dividend reinvestment plan allows
Vancouver, BC V6B 0A2 common and preferred shareholders to
Telephone: (604) 699-3678 purchase additional common shares by
Fax: (604) 699-3851 reinvesting their cash dividend without
Website: www.canadiandirect.com incurring brokerage and commission
fees. For information about
Valiant Trust Company participation in the plan, please
Suite 310, 606 - 4th Street S.W. contact the Transfer Agent and
Calgary, AB T2P 1T1 Registrar or visit www.cwbankgroup.com.
Toll-free: 1-866-313-1872
Fax: (403) 233-2857 Investor Relations
Website: www.valianttrust.com
For further financial information
Adroit Investment Management Ltd. contact:
Suite 1250, Canadian Western Kirby Hill, CFA
Bank Place Director, Investor & Public Relations
10303 Jasper Avenue Canadian Western Bank
Edmonton, AB T5J 3N6 Telephone: (780) 441-3770
Telephone: (780) 429-3500 Toll-free: 1-800-836-1886
Fax: (780) 429-9680 Fax: (780) 969-8326
Website: E-mail: [email protected]
www.adroitinvestments.ca
Online Investor Information
National Leasing Group Inc.
1525 Buffalo Place Additional investor information
Winnipeg, MB R3T 1L9 including supplemental financial
Toll-free: 1-800-665-1326 information and corporate presentations
Toll-free fax: 1-866-408-0729 are available on CWB's website at
Website: www.cwbankgroup.com.
www.nationalleasing.com
Quarterly Conference Call and Webcast
Stock Exchange Listings
CWB's quarterly conference call and
The Toronto Stock Exchange live audio webcast will take place on
Common Shares: CWB June 3, 2010 at 3:00 p.m. ET.
Series 3 Preferred The webcast will be archived on the
Shares: CWB.PR.A Bank's website at www.cwbankgroup.com
Common Share Purchase for sixty days. A replay of the
Warrants: CWB.WT conference call will be available until
June 17, 2010 by dialing (416) 849-0833
or toll-free (800) 642-1687 and
entering passcode 71761482.
For further information: Larry M. Pollock, President and Chief Executive Officer, Canadian Western Bank, Phone: (780) 423-8888; Kirby Hill, CFA, Director, Investor and Public Relations, Canadian Western Bank, Phone: (780) 441-3770, E-mail: [email protected]
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