Canadian Western Bank
The Graph of revenue per share (the red line) for Canadian Western Bank shows somewhat modest historical growth (5.2% compounded average annual growth in the 10 years on the graph). Adjusted earnings per share (the purple line) has had a few strong years but the overall result is an unexciting compounded average annual growth of 4.4% annually over the past ten years. The earnings per share declined in 2022 and in the first three quarters of 2023.
In the period shown, the book value per share has increased at an average of 7.3% per year which is surprisingly strong given the more modest earnings growth. The higher book value growth is explained in part by the fact that the ROE was typically in the 14% range over the first half of the ten years graphed here.
| Canadian Western Bank (CWB, Toronto) | |
| RESEARCH SUMMARY | |
| Report Author(s): | InvestorsFriend Inc. Analyst(s) |
| Author(s)’ disclosure of share ownership: | Author(s) hold shares |
| Based on financials from: | Oct. ’22 Y.E. + Q3 ’23 |
| Last updated: | September 2, 2023 |
| Share Price At Date of Last Update: | $ 29.30 |
| Currency: | $ Canadian |
| Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): | (higher) Buy at $29.30 |
| Qualifies as a stock that could be bought with confidence to hold for 20 years? | Yes |
| Has Wonderful Economics? | Good but not exceptional |
| Has Excellent and Trustworthy Management? | Yes |
| Likely to grow earnings per share at an attractive rate over the next decade? | Yes |
| Positive near-term earnings outlook? | Yes |
| Valuation? | Quite attractive |
| SUMMARY AND RATING: This cell attempts to summarize information from other cells in this report and the graph. Based on the graph, revenues and earnings per share have grown adequately but not spectacularly over the past ten years and earnings per share have recently declined. Importantly, this is a company that can probably be safely predicted to grow its earnings per share at an acceptable (although not outstanding) rate in the long term. Its economics are good although, like all banks, they rely on high leverage. At a recent price of $29.30 the value ratios indicate it is a reasonably strong company trading at a very attractive valuation and could be rated a (higher) Buy. The near-term outlook is for a return to growth in the last half of 2023 as loan yields reprice to higher interest rates. In 2024 (probably) earnings should accelerate as it laps the modest results of 2023 and potentially (finally) transitions to an advanced method of calculating risk-weighted assets that will allow it free up capital for faster growth. Management seems very strong in terms of loan management although they seem to have let expenses get a bit of control and have struggled with moving to the advanced system of risk management.. The industry structure is moderately attractive for this smaller incumbent. CWB does not appear to have any very strong competitive advantage but may have some advantages in its chosen field of commercial lending. As a bank incumbent, it has the advantage of an established sticky customer base. Liquidity is reasonable by bank standards but is still low on an absolute basis. (All banks are highly leveraged which means solvency can be threatened in adverse conditions, common equity can evaporate quickly due to losses in extreme situations.) The main risk is that higher loan losses develop. The insider trading signal is moderately positive. The macro environment is somewhat negative in terms of the potential recession and the impact of higher interest rates possibly cooling the demand for loans and causing higher levels of bad loans. In summary this is a simple business with good (but not great) long-term economics that is well managed and that is selling at what appears to be a quite attractive price. Overall, based on the attractive valuation, but tempered by the potential recession and the potential for bad loans we rate CWB a (higher) Buy. | |
| MACRO ENVIROMENT: A forecast North American recession is a head wind. Higher interest rates are also a headwind in terms of higher credit losses. | |
| LONG TERM VALUE CREATION: (Updated Q1 2023) CWB has been a reliable creator of long term value for share owners. This is demonstrated by retained earnings (after paying dividends) of $2380 million compared to common equity invested (after deducting the portion of buy backs that were return of capital) of $1003 million. It is also demonstrated by the 419% or 7.2% annual compounded gain (not counting dividends) since InvestorsFriend first featured this stock rating it a Strong Buy in August of 1999. And that 7.2% as of today is not benefiting from any P/E multiple expansion but rather a multiple contraction. | |
| DESCRIPTION OF BUSINESS: Updated April 2022. A (still mostly) western Canada regional bank with about 44 branches (Which includes its first branch in Ontario plus a newer virtual branch for Ontario) and with some associated lines of business. It has always been mostly a commercial lender and recently has sharpened its focus on serving businesses but including the personal banking needs of business owners. A traditional “spread” lender, it simply takes in/ holds deposits and lends them out at a higher rate. Total full-time equivalent staff of 2643. Related businesses include: Trust operations, a higher net worth wealth management operation, a national small-ticket leasing operation and a national franchise lending operation . About 88% of revenues are from the net interest income on lending and a further 4% is credit-related for a total of 92% directly lending-related. 6% of revenue is from wealth management. Loans are now 33% British Columbia, 31% Alberta 24% Ontario, 4% Saskatchewan, 3% Manitoba, 3% Quebec 3%, and 2% other. The loan book is only 20% personal mortgages and loans and much of that represents Alternative mortgages sourced through a broker network and there is no material exposure to unsecured personal loans such as credit cards, 33% general commercial loans, 21% commercial mortgages, 16% equipment financing & leasing, 9% real estate projects, and now just 1% oil and gas production loans. Deposits are 48% sourced from in-branch regular accounts and 17% in-branch term deposits (total 65% in-branch) and 21% retail term deposits sourced from the (higher interest cost but presumably lower admin cost) third party broker network and 14% from deposit bonds sold to institutional investors. Deposits are 50% personal (mostly GICs), 35% is commercial/government and 15% institutional investor deposit notes on the capital markets. A significant portion of the deposits are term deposits meaning they can’t be withdrawn on short notice. There are very minimal “high interest savings account” deposits of the type that fled Home Capital in 2017. Trust and Wealth management constitute only 7% of revenues but would be higher than that in terms of profit contribution. | |
| ECONOMICS OF THE BUSINESS: (updated March 2023) Pure spread lending accounts for 89% of revenue as of Q1 2023. In this business the bank takes in deposits and lends out money at a higher interest rate. The net interest spread was most recently about 2.32%. The 2.32% is after accounting for all assets and everything on the liabilities / equity side of the balance sheet. Gross profit is then reduced by the banks operating costs. The net profit after operating costs and income taxes is only about 0.77% of assets. With such a thin margin it becomes very important to avoid defaulting loans and where defaults occur to have security so that at least some amount is recovered. CWB’s allowance for bad debt has historically run at about 20 basis points per year. The 0.77% net profit on assets is then leveraged up by the fact that the loan assets are financed with only about 7.9% common equity (they are mostly financed with deposits) This results in an ROE of about 10.1% recently. Banking is attractive when loan losses are low because customers tend to be quite sticky. Unless there are unusual loan losses, lending banks make money literally every day as interest accrues. | |
| RISKS: Banks have very high total debt levels (including deposits) and there is a large potential for losses if poorly managed or in deep recession conditions. Larger banks have technology and scale advantages. The high leverage means that a small decline in revenues or a small increase in bad debt can chew through earnings and even book value very fast. There is a major risk of loan losses if the economy turns unexpectedly bad and the value of equipment securing the loans may plummet in that environment. As well, being (still mostly) a regional bank CWB cannot manage its risk as well as the larger banks through geographical diversification. There can be interest rate movement risks, although these are substantially (but not entirely) hedged against. However, the company has been profitable every quarter for some 30 years. The internet may make banking a more commodity product and lead to (permanently) lower returns on equity. See annual report for more risks. | |
| INSIDER TRADING: Checking “transactions in the public market” from October 31, 2022 to September 2, 2023 the insider trading signal appears to be moderately positive. The company itself had been selling shares under its At the Market program – however that selling was to raise equity capital and was done somewhat reluctantly. The bank did not sell any such shares in Q2 or Q3 2023. | |
| WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand (Pass, it is a simple bank although loan losses can appear suddenly), has favorable long-term economics due to cost advantages or superior brand power (marginal pass, as a small bank unlikely to have cost advantage, product is a commodity, but bank customers tend to be sticky and does have expertise in equipment and asset-backed lending), apparently able and trustworthy management (pass, the management has a strong track record and reputation), a sensible price – below its intrinsic value (pass, appears to be clearly under-valued), Other criteria that have been attributed to Buffett include: a low debt ratio (unclear, while it has low debt as such, it has the high leverage characteristic of all banks), good recent profit history (fail with recent earnings decline) little chance of permanent loss of the investors capital (pass, could lose if loan losses were high but would likely recover in the long run) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass). Buffett looks for companies that can be counted on to grow over the long term. This bank appears to qualify but it will likely never have the higher ROE of Canada’s largest banks. | |
| MOST RECENT EARNINGS TREND: See graph for the longer term trend. The adjusted (adjustments are minimal) earnings per share growth in the last four quarters starting with the most recent which was Q3 fiscal 2023, was minus 3%, minus 11%, minus 16%, and minus 14%. Revenue per share growth in the most recent four quarters, starting with the most recent, was minus 0.3%, minus 3.6%, minus 3.0%, and positive 2.3%. 2022 overall had adjusted earnings per share down 4% and revenue per share up 2%. 2021 overall had a 33% gain in earnings per share compared to the weak 2020 and a 12% gain in revenue per share. 2020 overall saw a 9.5% decline in adjusted earnings per share mostly due to higher loan loss provisions and this was despite a 5% gain in revenue per share. 2019 overall had 6% growth in adjusted earnings per share and 9% growth in revenue per share. Overall the most recent trend for earnings per share has been negative and the trend for revenue per share has been modestly negative as well. | |
| INDUSTRY SPECIFIC STATISTICS: (Updated Q3 , 2023) The provision for credit losses is running unusually low. The longer term average is about 0.20% to 0.25%. It was 0.16% in Q3 and 0.12% in Q2 It was negative in Q1 but we adjusted for that It was also low at 0.14% in 2022 and very low at 0.09% in 2021 after being high at 0.32% in 2020. Year over year loan growth was 6% in Q3 2023 and 9% in Q2 and 9% in Q1 2023 and was 9% in both 2022 and 2021 overall. Net interest margin improved to 2.37% in Q3 as more loans came due for renewal at higher rates. It was lower at 2.26% in Q2 and was 2.32% in Q1 2022 (low because deposit costs grew faster than loan yields) and was 2.41% in 2022 and 2.49% in 2021 overall which were lower than historic levels due to the low interest environment. Year over year deposit growth was4% in Q3 and 6% in Q2 and 9% in Q1 2023 and was 10% in both 2022 and 2021 overall. | |
| Earnings Growth Scenario and Justifiable P/E: This company currently pays out about 40% of trailing adjusted earnings as a dividend somewhat higher than their 30% target. The recent low P/E of about 8.8 is likely due to an anticipation or fears of an earnings decline or lack of earnings growth due to higher loan losses. But that fear seems over done. In part, the lower P/E and stock price is due to overall fears of recession. | |
| VALUE AND GROWTH RATIOS: Based on a share price of $29.30. The price to book value ratio is very attractive for this profitable bank at 0.85 (Price to tangible book is also quite attractive at 0.90 because they don’t have much purchased goodwill or equivalent). The trailing adjusted P/E (and adjustments in the trailing year are very minor) is very attractive at 8.8. Compounded fiscal five year growth in adjusted earnings per fully diluted share is reasonably good at 7.0% annual compounded. But it is more modest at a compounded 4.4% over the past ten years. Five year fiscal growth in revenue per fully diluted share was fairly good at 7.5% but more modest at 5.2% over the past ten years. The dividend yield is quite attractive at 4.5% and this reflects a pay-out ratio of 40% of trailing adjusted earnings. Adjusted ROE is good (but certainly not great) at 9.9% for the latest four quarters and is targeted at 12% by 2024 and 12 to 15% longer term. The intrinsic value (see below for more details) is calculated as $35 to $49 but this does assume the P/E will rise back towards historic higher levels of 10 to 12. These ratios in isolation would indicate a rating of (higher) Buy based on the valuation and the acceptable ROE and modest growth. | |
| TAXATION: Nothing unusual. The dividend qualifies for the Canadian dividend tax credit. | |
| SUPPORTING RESEARCH AND ANALYSIS | |
| Symbol and Exchange: | CWB, Toronto |
| Currency: | $ Canadian |
| Contact: | 0 |
| Web-site: | www.cwbank.com |
| INCOME AND PRICE / EARNINGS RATIO ANALYSIS | |
| Latest four quarters annual sales $ millions: | $1,100.6 |
| Latest four quarters annual earnings $ millions: | $315.2 |
| P/E ratio based on latest four quarters earnings: | 8.9 |
| Latest four quarters annual earnings, adjusted, $ millions: | $318.2 |
| BASIS OR SOURCE OF ADJUSTED EARNINGS: Starts with management’s figure for adjusted net income to common. Plus we have adjusted for certain unusual items identified in the earnings reports. In 2018 and 2017 this included a gain on selling parts of its Trust operations. To be conservative we have deducted gains on sales of securities (and in rare cases added back losses on securities). This does not adjust for volatile provisions for credit losses. However in Q1 2023 we did adjust to a normalized view of the provision for credit losses because the GAPP figure was negative which is totally abnormal. | |
| Quality of Earnings Measurement and Persistence: Earnings Measurement is not entirely reliable since it is based on estimates of loan losses. Earnings could go sharply lower in future if credit losses were to widen. As of Spring 2023, this is somewhat possible given higher interest rates and the potential for recession – but so far business customers have continued to do well.. | |
| P/E ratio based on latest four quarters earnings, adjusted | 8.8 |
| Latest fiscal year annual earnings: | $310.3 |
| P/E ratio based on latest fiscal year earnings: | 9.0 |
| Fiscal earnings adjusted: | $331.0 |
| P/E ratio for fiscal earnings adjusted: | 8.4 |
| Latest four quarters profit as percent of sales | 28.9% |
| Dividend Yield: | 4.5% |
| Price / Sales Ratio | 2.54 |
| BALANCE SHEET ITEMS | |
| Price to (diluted) book value ratio: | 0.85 |
| Balance Sheet: (Updated Q1, 2022 Canadian Western Bank’s balance sheet is highly leveraged, which is typical of banks. Assets are comprised as follows: Loans owed by customers 88%, interest bearing securities 9% (84% of which is debt issued by Canada, then debt issued by provinces and then corporate bonds). Other assets including receivables, goodwill and property total 2.2% and actual cash and cash deposits with other banks just 0.3%. On the liability and equity side of the balance sheet these assets are funded as follows: Customer deposits (including some institutional deposits) 80%, Actual debt 1.0%, capital notes debt that is considered equity 0.9% (somewhat similar to preferred shares), Quazi debt that exists because loans were securitised but left on balance sheet 7.1%, Other 1.9%, Preferred equity 0.7%, Common Equity 8.1%. Overall, the balance sheet is typical for a “community” bank but could still be considered to be somewhat weak given the leverage that is typical of banks. It also reflects an almost pure lending operation given the very high percentages for loans and deposits. | |
| Quality of Net Assets and Book Value Measurement: The reported assets should be relatively reliable. However, loans can typically be collected only over time and are subject to bad debt / credit losses. CWB keeps about 9% of its assets in extremely liquid bonds and a small amount of cash deposits with other banks which would be about market value. However, banks operate with exceedingly high leverage, therefore the reported book value could be eaten up very quickly if there were ever abnormally high loan losses. In the end, given the leverage, investors rely on the prudency of bank risk management policies and bank regulators. | |
| Number of Diluted common shares in millions: | 96.3 |
| Controlling Shareholder: No one can control more than 10% by law. | |
| Market Equity Capitalization (Value) $ millions: | $2,822.7 |
| Percentage of assets supported by common equity: (remainder is debt or other liabilities) | 7.8% |
| Interest-bearing debt as a percentage of common equity | 16% |
| Current assets / current liabilities: | not available |
| Liquidity and capital structure: Very high debt level (including deposits due to customers) which is typical for banks. This is off-set by the very liquid nature of the assets (easily converted to cash if needed). A low debt ratio if we exclude deposits and debt associated with securitised assets from the debt calculation. Their common equity to asset ratio recently was rather low in absolute terms at about 7.8%. However, this is actually good by bank standards. Tier 1 capital ratio – common equity plus preferred equity plus certain debt issues divided by risk-weighted assets (Tier 1 is designed to protect depositors not common share holders) is reasonable and even high by banking industry standards at 11.2% as of Q3 fiscal 2023 – and that is calculated using a more conservative approach CWB hopes to be allowed to use the less conservative method but unfortunately the transition has been much delayed and is not imminent. | |
| RETURN ON EQUITY AND ON MARKET VALUE | |
| Latest four quarters adjusted (if applicable) net income return on average equity: | 9.9% |
| Latest fiscal year adjusted (if applicable) net income return on average equity: | 10.8% |
| Adjusted (if applicable) latest four quarters return on market capitalization: | 11.3% |
| GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE | |
| 5 years compounded growth in sales/share | 7.5% |
| Volatility of sales growth per share: | strong reasonably steady growth |
| 5 years compounded growth in earnings/share | 7.0% |
| 5 years compounded growth in adjusted earnings per share | 7.0% |
| Volatility of earnings growth: | strong reasonably steady growth |
| Projected current year earnings $millions: | $342.0 |
| Management projected price to earnings ratio: | 8.3 |
| Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted) earnings per share? | Yes |
| Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: | 6.5% |
| More conservative estimate of compounded growth in earnings per share over the forecast period: | 4.0% |
| More optimistic estimate of compounded growth in earnings per share over the forecast period: | 8.0% |
| OUTLOOK AND AMBITIONS FOR BUSINESS: The near-term outlook appears to be for continued modest growth. Q4 2023 is expected to show a modest increase in earnings per share and that trend should accelerate in 2024. Higher loan losses remain a possibility but this has been very well managed to date. CWB is much less exposed to consumer credit compared to the larger banks and this may be beneficial in upcoming quarters. They clearly expect growth in the longer term. Management states that CWB is set to be a disruptive (or at least differentiated) force in Canadian Financial Services and to capture increased market share within a larger addressable market. They only target about a 10.25% ROE in 2023 and 12% in 2024 which is relatively modest. | |
| LONG TERM PREDICTABILITY: This bank does seem to offer long-term predictability. It has been growing for many years and it seems reasonable to predict that it will continue to do so and on a profitable basis. At some point, perhaps in 2024 it will (finally) increase profits through higher leverage when it is allowed to calculate its risk-weighted assets on a less conservative basis similar to the larger banks. The long term outlook for growth seems good. Longer term, internet banking seems like a commodity business and could definitely erode profit margins. Products that lead to customer stickiness like chequing accounts, investment accounts, and in-branch services are likely to remain high profit. Offsetting this, loan losses can be unpredictable. | |
| Estimated present value per share: We calculate $37 if earnings per diluted share grow for 5 years at the more conservative rate of 4% and the shares can be sold at a P/E of 10 after five years. And $52 if earnings per share grow at the more optimistic rate of 8% compounded for 5 years and the shares can then be sold at a P/E of 12. Note that this assumes that the P/E will rise towards its historical level. (This is not a share price prediction) Both estimates use a 7.0% required rate of return. | |
| ADDITIONAL COMMENTS | |
| INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that attractive industries are those that are relatively protected from competition based on 5 key tests or forces. The banking industry has relatively strong barriers to entry in terms of regulations, scale, technology, brand and access to attractive locations. However this is less so as more of the business is handled by brokers and by internet business (marginal pass). Not subject to powerful customers or suppliers who could usurp industry profits (pass and pass). No substitute product (pass) and not usually prone to excessive levels of competition but again this is changing with increased role of brokers and pure internet banking (marginal pass) will likely grow faster than the economy in general. It can benefit from increased computerization. In this industry it is possible to leverage existing assets and grow without a proportional increase in fixed assets. Overall we rate this as a moderately attractive industry for this established but smaller incumbent. | |
| COMPETITIVE ADVANTAGE: Strong conservative management with a focus on cost control, asset backed lending, and a focus on the core business of lending money at an interest spread above the cost of funds. This regional bank has an appeal to a certain segment of the population and to a certain segment of corporations. They indicate that they have an advantage in offering a more personalized service. Overall in banking it is unlikely to have cost advantages due to its smaller size. Bank customers do tend to be “sticky” which is positive. | |
| COMPETITIVE POSITION: CWB is far far smaller than the largest Canadian banks and has targeted commercial customers and business owners as personal banking clients. Commercial customers include commercial real estate loans including mortgages and equipment lending and CWB probably has more expertise in those areas. Also more recently targeting General Commercial loans (not clear if they have the same asset security there, we would think not) Seems to be well run but it’s not clear that is has any strong competitive advantage other than being well managed. Could be vulnerable to all-internet banks that have lower costs of operation. It is a cliché to claim that your employees are the best but CWB does appear to have excellent programs to attract and train good staff. They promote from within. | |
| RECENT EVENTS: The Bank did not issue any shares under its At The Market offering in Q3 or Q2 of 2023. Hopefully they will not issue any in Q4 but they might do so given the higher share price. The bank wants to make a very important transition to the advanced modeling method of calculating its risk weighted assets. This will allow it to employ even more leverage and increase its ROE and make it more competitive. This transition has been greatly delayed which is disappointing. It constantly appears to be about two years in the future. The bank is advancing various digital banking tools for its customers. The company has issued more shares through an At The Market offering to maintain capital ratios as its loans have grown. They did not issue any shares under the ATM in Q3 or Q2 2023. In 2022 the average issue price was below book value at $29.86 and was disturbingly low at $24.53 in Q1 2023 and just $23.32 in Q4 2022. In 2021 the average issue price was much better at $35.55 and in Q1 2022 it was$38.47. During the pandemic the allowance for loan losses was increased sharply but was later reversed as higher loan losses largely did not materialise. In 2020 they purchased iA Investment Counsel with operating brads T.E. Wealth and Leon Frazer and associated for a purchase price of $87 million. This substantially increased wealth assets under management from $2.1 billion to $6.2 billion at that time. The bank has recently apparently decided that it will focus almost exclusively on serving businesses and business owners including the personal banking needs of the business owners. But it still serves individuals in its Optimum mortgage business and still competes for personal GIC deposits. The bank continues to very significantly grow Ontario as a percentage of its loans (which were 16% at the end of fiscal 2016 and rose to 25% as of Q1 2023. The proportion of deposits raised in branch is generally increasing most quarters which decreases the reliance on the deposit broker channel. Has implemented a new banking computer system using software from Temenos who they say is the world leader in banking software and is rolling out new capabilities. It has recently gained more ability to securitise residential mortgages. It created a virtual branch to remotely serve customers in areas where it does not have branches such as Ontario. It has opened its first two physical branch in Ontario (Mississauga and Markham) and will open a branch in downtown Toronto in 2023. As of early 2021 they now have digital onboarding for all new personal clients. | |
| ACCOUNTING AND DISCLOSURE ISSUES: The disclosure detail is very good. They give the relevant figures in a concise manner. The Banking industry standard reporting is much more comprehensive and standardized compared to reporting required by non-bank GAAP and the stock exchanges. However by nature, banking industry profits are uncertain since they depend on estimating bad loan debt expenses and the estimate can be vastly under-stated when recession conditions arise suddenly. In 2017 and 2018 they failed to deduct a gain on selling part of their Trust business in calculating adjusted earnings. They follow a rigid definition of adjusted earnings rather than attempting to give the best figure normalised for unusual items. In general, accounting rules create a few oddities in the accounting such as the requirement to maintain on balance sheet securitised loans that have actually been sold which inflates the apparent level of debt. | |
| COMMON SHARE STRUCTURE USED: Normal common shares, 1 vote per share. | |
| MANAGEMENT QUALITY: Management has a reputation for being capable and conservative. Management seems quite strong. Management seems to be focused on shareholder value. However, they may also be more focused on growing the business as opposed to the value per share. They have taken excessively long to move to a more advanced risk asset model. They also may have let expenses get out of hand in the past few years. | |
| Capital Allocation Skills: Management appears to have made reasonably good choices in investing its capital and in its financing. It has made a number of acquisitions over the years which have worked out well. It targets a dividend of about 30% of earnings which is reasonable although it may have been wiser, in theory, to have retained those earnings. The share count has increased by 18% in the ten years ended in October 2022. This was largely due to the use of convertible debt and other options and warrants but also some share issues at relatively low prices in particular the recent use of the At The Market offering at low prices. The bank has obtained approvals for share buybacks on occasion but they bought back no shares until they bought back 2% of their shares at very good prices near the end of 2018 and just 0.07% in the Summer of 2019 and just 0.2% in fiscal 2020. (The difficulty perhaps being that times of very low share prices usually coincide with times of risk when capital must be preserved and since March 2020 the regulator banned share repurchases). Given recent events, management may have been quite wise to have bought back only minimal shares recently. More recently they have been issuing shares under an “At The Market ” program. It’s disappointing to see shares issued at relatively low prices but it may have been a sort of necessary evil. | |
| EXECUTIVE COMPENSATION: Compensation appears reasonable and not excessive. 2022 compensation was $2.9 million for the CEO, and $0.9 to $1.3 million for the other four named executives. By today’s standards this is not unreasonably high. | |
| BOARD OF DIRECTORS: (updated from Winter 2022 proxy circular) 11 members. They are well qualified with extensive experience in banking and the investment management industry and some with experience in the heavy equipment business and real estate business (both key customer groups for the bank). It is comforting to note that the majority of Board members have shown their personal confidence by holding a substantial number of shares. (however, this signal is diluted because the bank requires them to own shares). Board compensation is not excessive at roughly $200k. Board members appear to be mostly wealthy enough that they would not be overly beholden to the bank (they can act independently because the Board retainer is not a very “big deal” financially for them). | |
| Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry. | |
| DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice. | |
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