Impact of southern Alberta floods on the loan portfolio
A total of 21 residential mortgages with a combined authorized dollar value of $8.6 million were identified as potentially impacted by the floods, but none have been classified as impaired. All residential mortgage discussions have confirmed that insurance is in force and clients are proceeding with claims on their respective properties, including, where applicable, provincial disaster relief applications. Flooding also temporarily compromised the ability of many businesses in the affected regions to operate. The Bank identified 13 potentially affected business clients where property inspections were completed by CWB staff. These inspections confirmed no extensive damage to any of the affected clients' operations or property securing CWB advances. With the information available at August 28, 2013, management expects the collective allowance for credit losses is sufficient to absorb any flood-related losses that may be identified in the future.
One of management's key priorities is to deliver strong long-term growth while maintaining effective control of costs. Significant anticipated expenditures relate to additional staff complement to support ongoing growth, as well as expanded infrastructure and further investment in technology. This strategy is aligned with a commitment to maximize long-term shareholder value and is expected to provide material benefits in future periods. Work toward implementation of a new core banking system is well underway. Current plans estimate completion of this very significant technology project in 2015 based on an initial capital budget of $50 million. Upgrades and expansion of branch infrastructure are also ongoing. Compliance with an increasing level of regulatory rules and oversight for all Canadian banks requires the investment of both time and resources, which further contributes to higher non-interest expenses.
Q3 2013 vs. Q3 2012
Quarterly non-interest expenses of $67.0 million were up 13% ($7.8 million) compared to the same quarter last year primarily reflecting 12% ($4.7 million) higher salaries and benefits and a 21% ($2.1 million) increase in general expenses. Of the $7.8 million total increase in non-interest expenses, $1.5 million (19%) reflects the current quarter addition of McLean & Partners. The overall change in salaries and benefits, excluding McLean & Partners, mainly resulted from higher compensation expense associated with a larger staff complement to support ongoing growth across all businesses. Increases in stock-based and variable compensation were influenced by both the increase in staff complement and a higher number of employees participating in the Bank's long-term incentive plan. The change in general expenses was driven by increases of $0.3 million each in deposit insurance premiums and employee training, as well as a $0.2 million increase in community investment. Employee training costs relate to delivery of the Bank's Being Crucial training program to almost all client-facing account managers within the branch network. Premises and equipment expense was 11% ($1.1 million) higher primarily due to increases in direct computer costs, ongoing upgrades to existing technology and infrastructure, and costs associated with the opening of a new full-service branch in Winnipeg, Manitoba in the latter part of 2012.
Q3 2013 vs. Q2 2013
Compared to the previous quarter, non-interest expenses were up 3% ($2.1 million), with the addition of McLean & Partners accounting for 76% ($1.5 million) of the difference. Excluding the contribution of McLean & Partners, the change in composition of non-interest expense mainly reflected $1.2 million lower marketing and business development costs, offset by expenses related to salaries and benefits, employee training, regulatory costs and professional services.
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