SUMMARY OF OPERATIONS Fiscal 2023 represented a year where we successfully adapted to changing economic conditions. Elevated inflation continued to persist, and the Bank of Canada responded by increasing policy interest rates an additional 125 basis points through the first half of 2023. Against this backdrop, we targeted our loan growth to optimize risk-adjusted returns, prudently managed our expenses and focused on the timely resolution of unsatisfactory loans as we continued to benefit from our secured lending model and prudent risk appetite. We delivered financial performance that grew stronger as the year progressed and are well positioned to capitalize on the opportunities in front of us as we manage through the continued economic volatility. Loan growth of 4% was strategically focused on optimizing risk-adjusted return opportunities within our disciplined risk appetite. We strategically target general commercial clients as they provide the strongest potential to increase full-service client relationships across our national footprint, and our teams delivered 10% annual growth in this portfolio. We also continued to execute our geographic diversification strategy, with loan growth of 10% in Ontario supported by our Mississauga and Markham banking centres. Relationship-based branch-raised deposits decreased 1% from last year as a 9% increase in fixed term deposits were more than offset by a 5% decrease in demand and notice deposits. Lower branch-raised demand and notice deposits primarily reflected our intentional exit of select higher cost non-full-service client relationships early in the year, which we replaced with insured, fixed term broker deposits. Our number of full-service clients, who have a core banking relationship with us, continued to increase this year despite the volatility in the global banking industry. Annual revenue increased 3% from last year. Net interest income increased 4%, primarily driven by 4% annual loan growth, partially offset by a seven basis point decrease in net interest margin. The decline in net interest margin reflected the impact of lower loan related fees, including payout penalties and a proportional shift in our funding mix towards fixed term branch-raised and insured broker deposits. Non-interest income was down 4% from the prior year primarily due to lower foreign exchange revenue recorded in ‘other’ non-interest income, which was elevated in the prior year due to a rapid and significant strengthening of the U.S. dollar. Non-interest income was also supported by the launch of our new business credit cards in partnership with Brim Financial. Our borrower delinquency and default rates returned to historically normal levels this year, as expected. Our total annual provision for credit losses represented seven basis points as a percentage of average loans, compared to 14 basis points last year, and remained well below our historical average. The provision for credit losses on impaired loans of four basis points was six basis points lower than last year, primarily due to an increase in recoveries of impaired loan write-offs upon final resolution. Our credit performance continues to be supported by our strong credit risk management framework, including well-established underwriting standards, the secured nature of our lending portfolio with conservative loan-to-value ratios, and proactive approach to working with clients through difficult and uncertain periods. Total non-interest expenses of $611 million were up 5% ($30 million). The increase included $17 million of costs incurred to execute reorganization initiatives to realize efficiencies in our banking centre footprint, operational support functions, and administrative processes. We executed most of the planned organizational redesign activities in the fourth quarter of fiscal 2023 and expect limited further activity within fiscal 2024. Adjusted non-interest expenses increased 6%, due to a higher average staffing complement, the impact of annual salary increments, the investment in our digital capabilities and higher capital taxes. Higher non-interest expenses were partially offset by lower spending on strategic projects, our continued actions undertaken during the year to contain expense growth, and the beneficial impact associated with a larger scientific research and experimental development (SR&ED) investment tax credit realized this year. Our fiscal 2023 efficiency ratio of 52.6% increased from 51.5% in the prior year, as non-interest expense growth outpaced revenue growth primarily due to the decrease in net interest margin as discussed above. The current year income tax expense increased 11% ($12 million) compared to 6% growth in net income before taxes due to an increase in the current year effective income tax rate. The current year effective income tax rate of 26.1% was 120 basis points higher than last year, primarily driven by the combined impact of the additional 1.5% of federal income tax associated with the enactment of Bill C-32 and non-recurring adjustments related to the completion of our prior year tax filings that increased tax expense in the current year compared to a reduction in tax expense recognized when our filings were completed in the prior year. Diluted earnings per share of $3.38 was relatively consistent with the prior year and adjusted earnings per common share of $3.58 declined 1%. Our return on common shareholders’ equity (ROE) of 9.8% and adjusted ROE of 10.4% decreased 30 and 40 basis points, respectively, as an increase in our common shareholders’ income, was more than offset by higher common shareholders’ equity. Higher common shareholders’ net income was primarily driven by higher revenues and a lower provision for credit losses, partially offset by higher non-interest expenses, as discussed above. Our CET1 capital ratio at October 31, 2023 of 9.7% increased 90 basis points compared to last year, reflecting the impact of retained earnings growth, a reduction in accumulated other comprehensive loss related to an increase in unrealized gains on debt securities measured at FVOCI, the adoption of the Capital Adequacy Requirements (CAR) 2023 guidelines and the impact of common shares issued under our at-the-market (ATM) program in the first quarter of the year, which more than offset targeted growth in risk-weighted assets. Our Tier 1 capital ratio of 11.5% and Total capital ratio of 13.5%, reflected increases of 90 basis points and 140 basis points, respectively, due to the proportional impact these same factors. Our Total capital ratio also reflected the issuance of $150 million Series H Non-Viability Contingent Capital (NVCC) subordinated debentures in the year.
CWB Financial Group 2023 Annual Report | 19
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